Portfolio Insight – BlackRock AN INTERVIEW WITH ANDREW REID
A DEFINED BENEFIT ROADMAP
BlackRock’s managing director Andrew Reid tells Andrew Holt about the impact of last year’s gilt volatility on DB pension schemes, and the trend that could see liability-driven investing (LDI) continue to be important and evolve with regulation and schemes’ journeys.
September’s gilt volatility had a deep impact on many defined benefit (DB) pen- sion schemes. How do you view the affair? I would like to take a step back, if I may, and look at the whole of last year. General- ly, the funding positions of defined benefit pension schemes improved in 2022. By far the biggest influence was the sell-off in real rates. The yield on long dated index- linked gilts has the greatest impact on the value of a pension scheme. If that yield ris- es, the value of a scheme’s liabilities falls. And that yield climbed by around 3% per
28 | portfolio institutional | June 2023 | Issue 124
annum during 2022, which had a huge impact on liabilities. As a rule of thumb, a 1% per annum increase in yield might lead to a 15% decrease in the value of a scheme’s liabilities. So it is huge. Now, most defined benefit pension schemes have liability-driven investments (LDI). In its broadest definition, it means considering your liabilities when you in- vest. A narrower interpretation is achiev- ing real yield exposure through hedging interest rates and inflation. How it typical- ly works is that if your liabilities rise in
value, you buy an equivalent asset that roughly goes up by the same amount. If your asset portfolio matches any change in the liabilities, through changes in the yields, then you would be 100% hedged. Last year, because schemes were less than 100% hedged, liabilities fell further than assets did, so pension scheme funding positions improved, perhaps by 10% or more, on average.
The funding level is the value of assets di- vided by the value of liabilities with 100% classed as fully funded. Overall, the sell-
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