You may have heard the term ‘Liability Driven Investments (LDI)’ in the press recently and be wondering how it affects this Plan and your pension. We thought it would be useful to explain a little about what LDI is and why the Plan uses it as part of its investment strategy to manage its funding position.

 What is LDI and why has it been used by the Plan?

Volatility in interest rates is a key investment risk for defined benefit pension schemes (including this Plan) and has the potential to cause large swings in the Plan’s funding position, if not appropriately managed. Pension plans (including this Plan) have been using LDI to manage funding risk. This is because the value of LDI assets move in a similar direction and magnitude to the value placed on the Plans future pension obligations, known as the liabilities . i.e. when interest rates fall the value of liabilities rises and the value of LDI assets also rises and when interest rates rise the opposite is true. It therefore avoids large swings in the funding deficit. The LDI strategy is designed to significantly reduce and manage the volatility in the Plan’s funding position and maximise the probability of paying benefits as they fall due.

The Trustee regularly reviews the effectiveness of the LDI strategy and can confirm that it is performing as intended.

The Plan’s funding position

The Trustee can confirm that whilst the funding position of both Sections of the Plan between 31 October 2021 and 31 October 2022 did decrease, this was primarily because of falls in the value of return seeking assets such as equities, credit and property throughout 2022 not just during the gilts crisis. These falls were in line with market conditions and not specific to the Plan. Whilst that is disappointing, the nature of investing in return seeking assets is that there will always be volatility in the investment returns.

The Technical Provisions funding level did fall over the year, to just below 100% for each Section, but the funding level was still 99.2% for the HP Section and 98.9% for the Digital Section at 31 October 2022. In comparison, the corresponding funding levels were 76.3% and 75.2% 10 years ago (as at 31 October 2012). This improvement over time was achieved through a combination of Company contributions and investment returns, with the LDI portfolio helping to reduce funding level volatility over the period.

The Trustee is satisfied that the use of LDI has been, and continues to be, an appropriate investment approach over the long term. The Trustee monitors the funding level on a monthly basis (or more frequently during times of market stress) and Company contributions are recalculated annually.

The gilt market crisis and misinterpretation of LDI

The turmoil experienced in gilt markets during September and October 2022 was unprecedented, which has led to negative media portrayal of LDI strategies in general terms. This view largely ignored the beneficial impact of LDI during other periods of market stress (for example during the Eurozone credit crisis, Brexit and Covid-19). Without the LDI holdings, during this time it would have led to significant reductions in the funding position of both Sections of the Plan.

Historic and current impact of LDI on the Plan

It is important to understand the merits and impact of LDI. Since the Plan first introduced an LDI mandate in 2008, the LDI assets have closely matched the liabilities to deliver the intended returns and risk management objectives. This was also true during the recent gilt market crisis.

Prior to September 2022, the LDI assets and the liabilities for each Section of the Plan had increased by over £900m since the introduction of the LDI portfolio. Had the LDI portfolio not been used over this period, the funding position of each Section would have been significantly less.

Despite the impact of the gilt market crisis, the LDI returns since the Plan’s LDI portfolio was introduced in 2008 are still net positive, with each Section being better off than if the Plan had not invested in LDI. It has also increased the security of members’ benefits in the Plan.

Reviewing the Plan’s investments – including LDI

The Trustee continues to monitor its investment holdings regularly and takes all appropriate investment and legal advice in respect to the investments it makes and holds. This is equally true of the assets within the LDI portfolio held by the Trustee. 

The Trustee also takes advice on compliance matters in relation to its investments and is taking all appropriate steps to ensure compliance with recent guidance issued by The Pensions Regulator, and other regulatory bodies, in respect of its LDI portfolio.

You can view the Statement of Funding Principles and Statement of Investment Principles within the Library section of the website for more information.