Cashflow solutions in action: from LDI to physical bonds

5 min read 5 Jun 19

Summary: How do cashflow solutions work in practice? This case study shares our recent work with a large UK defined benefit pension scheme to transition from significant swap exposure to a cashflow solution based on physical assets.

  • A pension scheme’s transition to a fully cashflow-driven mandate is evolution rather than revolution, usually a series of events over time
  • We worked with the trustees and consultant of a large UK defined benefit pension scheme to reduce the complexity of the scheme’s liability-driven investment (LDI) portfolio and increase investment in physical matching assets
  • We substantially simplified the scheme’s interest rate and inflation swaps, which resulted in the release of a significant amount of gilts from the collateral portfolio
  • The transition to physical bonds offered the scheme potential for additional yield and opportunities to smooth the cashflow profile

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The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested.

By Georgina Clarke