Thu, 19/04/2018 - 12:58
Index provider STOXX and defined benefit pensions specialists RiskFirst have jointly launched the iSTOXX RiskFirst LDI index family.
The range of liability driven investment indices are based on 12 profiles, capturing member type, duration, type of indexation (pre- and postretirement), interest rate and inflation sensitivity and tax-free cash component of typical UK pension schemes.
The indices combine STOXX’s real-time fixed-income index calculation capabilities with a unique set of data provided by RiskFirst.
The iSTOXX RiskFirst LDI indices track the performance of corporate and government bonds denominated in GBP. They are designed to function as flexible, investable building blocks for LDI portfolios. Four different sets of indices are provided: nominal bond indices, inflation-linked bond indices, blended indices and non-gilt indices. The indices are constructed using a proprietary cash flow matching model that incorporates best-in-class LDI techniques.
RiskFirst’s Chief Strategy Office, Matthew Bale explains that the driver behind developing the indices is some of the governance issues that exist in the UK’s pensions investment market.
“Pension funds, endowments and foundations tend to work with a consultant and they come up with an asset allocation and that goes off to the investment manager who then creates an index or benchmark,” he says.
It is the benchmark that is an independent reference, a guide that the investment manager is doing what they said they would do, plus it offers a level playing field for users to compare different managers, and finally an opportunity to assess the risk in a portfolio.
“It’s fundamental for good guidance and what pension trustees look for,” Bale says. However, within liability driven investment, managers typically self-index which gives no opportunity for comparison.
“The drive was to clean all that up,” Bale says. RiskFirst has data on 4,000 different benefit tranches across the market and found there was a lot of similarity between plans so came up with 12 different liability profiles which match the vast majority of pension plans.
Both STOXX and RiskFirst spoke to pension plans and asset managers in the development of the indices and received positive feedback in terms of the use and need for having independent liability driven investment benchmarks.
STOXX executive Ashar Muhammad says: “Going forward the adoption will vary from using them as benchmarks to over time using them as building blocks. As soon as investment managers start to offer portfolios on these, the ETF providers will step in and offer solutions.”
Matt Seymour, RiskFirst’s CEO says: “We are providers of technology in the defined benefit pension space so we could bring together all the participants such as pension plans, consultants and asset managers.
“The tie up with STOXX is useful as we could talk to our client base and canvas their opinion and all groups saw this as a positive step which was candidly fundamental to the proposition.”
Benchmarking pension investment will not lead to bland performance, the index creators believe.
Seymour says: “We will see the use of these indices evolve from at the beginning where it helps with governance and establishing clear dividing lines of roles and responsibility but people will still compete with each other so people will still look for out-performance but it will come from something clearly understood by the industry.”
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