Liability Aware Investing

Liability Aware Investing

Liability Aware Investing is a framework for proactively managing the various liability risks and investment return requirements that are faced by defined benefit pension schemes and insurance companies, as they seek to meet their payment obligations.

Liability Aware Investing is a strategic priority at Aberdeen Standard Investments and we have invested significant resource and experience to ensure that we are ideally placed to work in partnership with our clients and deliver the solutions and service that they are looking for.

Our depth of capability that we have in LDI (Liability driven investment) and Fixed Income (including liquids and illiquids), combined with our insurance heritage, ensure that we are perfectly placed to not only help clients with their existing LDI requirements but also guide them to their “endgame”, be that self-sufficiency or buyout-ready solutions.

What we offer our clients

Our Liability Aware fund range includes a range of pooled fund “building blocks” that allow solutions to be tailored to the needs of small and medium-size pension schemes.

  • Our Integrated Liability Plus Solutions (ILPS) fund range provides liability hedging plus exposure to a range of growth engines in a single fund, making efficient use of collateral.
  • We are launching a range of “hedging only” LDI profile funds – two average (nominal and real) and two long (nominal and real) profile funds – to allow schemes to increase their hedging precision as they approach full funding.
  • For maturing pension schemes where having to meet outgoing cashflows becomes an increasing need, we are launching a number of cashflow-aware credit solutions. Our range of Liability Aware CDI (Cashflow driven investment) funds are available to investors. Please see below for more details.

Integrated Liability Plus Solutions (ILPS)

Key Features

  • We developed our ILPS funds to help our defined benefit pension clients control both asset and liability risks while maintaining their return targets.
  • ILPS is a unique, innovative approach to liability management that integrates a cash-efficient return engine with leveraged liability hedging within a suite of single pooled funds.
  • Since 2005, we have successfully used a similar approach to restore our own Standard Life Staff Pension Scheme to a sustainable surplus.

How does ILPS work?

Each £1 in an ILPS fund has two objectives:

  • Hedging Portfolio - to provide c.£2 protection (i.e. hedge) against changes in the value of liabilities arising from movements in interest rates and (in the Real Funds) inflation expectations; and
  • Growth Portfolio - at the same time, to seek a return over the long term on the £1 invested in the portfolios.
    • Liability Aware Absolute Return II Fund (LA AR II), targeting cash* + 3% per annum over rolling three-year periods.
    • Liability Aware Absolute Return III Fund (LA AR III), targeting cash** + 5% per annum over rolling three-year periods.
    • Liability Aware Equity Fund (LA Equity), a new addition to our ILPS fund range, targeting a return in line with passive global equity markets (MSCI All Country World Index).
*cash is defined as 3-month LIBOR **cash is defined as 6-month LIBOR

 

Liability Aware CDI (Cashflow driven investments)

Background

Following closure to new members, many DB pension schemes are now becoming cashflow negative, i.e. where benefit outgo exceeds income from contributions and investments. Many schemes are therefore paying more attention to arranging their assets to deliver the income required to pay benefits, often referred to as “Cashflow Driven Investment” or “CDI”.

For larger pension schemes targeting self–sufficiency, a segregated approach may be appropriate; however, for small to medium sized pension schemes a pooled solution may be more suitable. Our Liability Aware CDI fund range can be used by pension schemes to create a bespoke cashflow payment profile that fits their particular scheme’s future cashflow requirements after allowing for contributions and income from other assets such as private debt or real estate.

The Liability Aware CDI fund range consists of five three-year “buckets”, allowing pension schemes to tailor their holdings to meet their cashflow requirements.

They are a series of maturity dated cashflow funds, managed on a buy & maintain basis that look to deliver a relatively predictable series of cashflow from a portfolio of nominal corporate bonds – with coupons and redemption proceeds paid out over time. The funds are expected to invest in nominal GBP corporate bonds only at outset.

These funds will be managed by our Fixed Income team. The team is very experienced at managing buy & maintain credit and has a strong track record of avoiding downgrades. For more information please visit our Fixed Income site.

What is CDI?

A cashflow driven investment (CDI) strategy selects assets which provide contractual income to match, as far as possible, the future expected cashflow requirements of the pension scheme. By matching cashflows, the assets are intended to be held to maturity and so provide a greater level of certainty over return.

CDI has been employed by insurance companies to back their annuity books for a long time. Although pension schemes are not bound by insurance company regulations, CDI is increasingly being seen as an appropriate strategy to provide a stable, long-term and low-risk solution for a maturing scheme, reducing reliance on the sponsor.

CDI works best when integrated with Liability Driven Investment (LDI), particularly as cashflow matching of long-dated liabilities with credit may not be possible at the outset or may be only partially affordable. LDI can also be used with the aim to provide inflation protection, where insufficient inflation-linked credit assets are available.

Although a “Buy and Maintain” style of investing is at the core of CDI strategies, reinvestment risk, liquidity risk, default risk and liability experience should be monitored over time with the strategy updated accordingly to ensure it remains fit for purpose.

For further information on CDI, including how to construct a CDI portfolio and the differences with buy-and-maintain credit, please see our articles.

Our People

Mark Foster

Mark Foster

Global Head of Pension Solutions

Email: mark.foster@aberdeenstandard.com

Telephone: +44 1313 72 0975

Mark leads the Pension Solutions team where he is globally responsible for driving innovation and product strategy across LDI, CDI and looking to identify opportunities across regions and client types. Mark joined Aberdeen Standard Investments in early 2011 and is leading the continued development of our Liability Aware investment capability. He began his career at Aegon and was involved in advising pension schemes on a range of investment and actuarial issues. Mark then moved to Mercer’s Edinburgh office where he was a senior investment consultant. He was also part of their UK Strategy team, Financial Strategy Group and was leader of the Edinburgh team for his last two years. Mark has 20 years’ experience in the industry and 9 years’ experience at Aberdeen Standard Investments.

Douglas Hogg

Douglas Hogg

Senior Solutions Director – Pensions

Email: douglas.hogg@aberdeenstandard.com

Telephone: +44 1313 72 1436

Douglas joined Aberdeen Standard Investments in 2014, initially as a Client Director looking after a range of institutional clients across the UK, before joining the Pension Solutions team in April 2018. Douglas is a qualified actuary and previously worked as an actuary at the Punter Southall Group. Across his career Douglas has provided advice to both trustees and sponsoring employers of pension schemes on a wide range of issues from actuarial valuations to investment strategy reviews and designing de-risking solutions for his clients. Douglas has 17 years’ experience in the industry and 4 years’ experience at Aberdeen Standard Investments.

Keith McInally

Keith McInally

Senior Solutions Director - Pensions

Email: keith.mcinally@aberdeenstandard.com

Telephone : +44 131 345 3600

Keith joined the Pension Solutions team as an Investment Director in January 2019 with an initial focus on LDI and CDI opportunities. Keith is a qualified actuary and previously worked as a senior investment consultant within the Financial Strategy Group at Mercer, where he provided complex investment advice to a wide range of DB clients with £20m to £4bn of assets. Keith’s main focus at Mercer was on LDI, investment strategy and journey planning. Keith started his career in the Retirement team at Mercer supporting scheme actuaries with DB pension valuations. Keith is a qualified actuary and has 8 years’ experience in the industry and 1 years' experience at Aberdeen Standard Investments..

Keith is a fellow of the Institute and Faculty of Actuaries, Chartered Enterprise Risk Actuary (CERA). He also graduated with a BA (Hons) in Actuarial Science from Heriot Watt University.

Timea Varga

Timea Varga

Senior Solutions Specialist - Pensions

Email: timea.varga@aberdeenstandard.com

Telephone : +44 1313 72 0209

Timea is responsible for developing initiatives across LDI, CDI and pensions solutions. Timea joined Aberdeen Standard Investments in 2014 and worked within our Enterprise Risk Management Team where she was a Risk Consultant. Previously, Timea worked as a Trainee Actuary at PwC. As an Associate in PwC’s Pensions Consulting team, Timea was involved in a variety of work related to clients’ occupational DB schemes including valuations and risk management exercises.

Timea has 8 years’ experience in the industry and 5 years’ experience at Aberdeen Standard Investments. Timea has a Diploma in Actuarial Techniques from the Institute and Faculty of Actuaries and a Masters in Management (with Distinction) from Queen’s University Belfast.

Keith McInally

Neil Falconer

Head of Liability Aware

Email: neil.falconer@aberdeenstandard.com

Telephone: +44 131 550 7924

Neil joined Aberdeen Standard Investments via the acquisition of SWIP in April 2014. Neil started in SWIP joining from the actuarial division of Scottish Widows in 2005. After initially managing international government bond funds, Neil moved on to focus on developing derivative based solutions for SWIP’s insurance company and pension funds clients. Neil has led the Liability Driven Investment team since 2010.

Neil started his career in 1997 as an actuarial trainee with Scottish Life. He qualified as a fellow of the Institute and Faculty of Actuaries in 2001. He holds a first class honours degree in Actuarial Mathematics and Statistics from Heriot-Watt University.

  • Mark Foster

    Global Head of Pension Solutions

    Email: mark.foster@aberdeenstandard.com

    Telephone: +44 1313 72 0975

    Mark leads the Pension Solutions team where he is globally responsible for driving innovation and product strategy across LDI, CDI and looking to identify opportunities across regions and client types. Mark joined Aberdeen Standard Investments in early 2011 and is leading the continued development of our Liability Aware investment capability. He began his career at Aegon and was involved in advising pension schemes on a range of investment and actuarial issues. Mark then moved to Mercer’s Edinburgh office where he was a senior investment consultant. He was also part of their UK Strategy team, Financial Strategy Group and was leader of the Edinburgh team for his last two years. Mark has 20 years’ experience in the industry and 9 years’ experience at Aberdeen Standard Investments.

  • Douglas Hogg

    Senior Solutions Director – Pensions

    Email: douglas.hogg@aberdeenstandard.com

    Telephone: +44 1313 72 1436

    Douglas joined Aberdeen Standard Investments in 2014, initially as a Client Director looking after a range of institutional clients across the UK, before joining the Pension Solutions team in April 2018. Douglas is a qualified actuary and previously worked as an actuary at the Punter Southall Group. Across his career Douglas has provided advice to both trustees and sponsoring employers of pension schemes on a wide range of issues from actuarial valuations to investment strategy reviews and designing de-risking solutions for his clients. Douglas has 17 years’ experience in the industry and 4 years’ experience at Aberdeen Standard Investments.

  • Keith McInally

    Senior Solutions Director - Pensions

    Email: keith.mcinally@aberdeenstandard.com

    Telephone : +44 131 345 3600

    Keith joined the Pension Solutions team as an Investment Director in January 2019 with an initial focus on LDI and CDI opportunities. Keith is a qualified actuary and previously worked as a senior investment consultant within the Financial Strategy Group at Mercer, where he provided complex investment advice to a wide range of DB clients with £20m to £4bn of assets. Keith’s main focus at Mercer was on LDI, investment strategy and journey planning. Keith started his career in the Retirement team at Mercer supporting scheme actuaries with DB pension valuations. Keith is a qualified actuary and has 8 years’ experience in the industry and 1 years' experience at Aberdeen Standard Investments..

    Keith is a fellow of the Institute and Faculty of Actuaries, Chartered Enterprise Risk Actuary (CERA). He also graduated with a BA (Hons) in Actuarial Science from Heriot Watt University.

  • Timea Varga

    Senior Solutions Specialist - Pensions

    Email: timea.varga@aberdeenstandard.com

    Telephone : +44 1313 72 0209

    Timea is responsible for developing initiatives across LDI, CDI and pensions solutions. Timea joined Aberdeen Standard Investments in 2014 and worked within our Enterprise Risk Management Team where she was a Risk Consultant. Previously, Timea worked as a Trainee Actuary at PwC. As an Associate in PwC’s Pensions Consulting team, Timea was involved in a variety of work related to clients’ occupational DB schemes including valuations and risk management exercises.

    Timea has 8 years’ experience in the industry and 5 years’ experience at Aberdeen Standard Investments. Timea has a Diploma in Actuarial Techniques from the Institute and Faculty of Actuaries and a Masters in Management (with Distinction) from Queen’s University Belfast.

  • Neil Falconer

    Head of Liability Aware

    Email: neil.falconer@aberdeenstandard.com

    Telephone: +44 131 550 7924

    Neil joined Aberdeen Standard Investments via the acquisition of SWIP in April 2014. Neil started in SWIP joining from the actuarial division of Scottish Widows in 2005. After initially managing international government bond funds, Neil moved on to focus on developing derivative based solutions for SWIP’s insurance company and pension funds clients. Neil has led the Liability Driven Investment team since 2010.

    Neil started his career in 1997 as an actuarial trainee with Scottish Life. He qualified as a fellow of the Institute and Faculty of Actuaries in 2001. He holds a first class honours degree in Actuarial Mathematics and Statistics from Heriot-Watt University.

Warning
Risk warning - Investment involves risk. The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested. Past performance is not a guide to future results.