Structured Equity: The icing on the LDI cake?
The juggling act between return generation and risk management can lead to a persistent challenge for many trustees and Sponsoring Employers today
The juggling act between return generation and risk management can lead to a persistent challenge for many trustees and Sponsoring Employers today, particularly in the wake of market volatility. This calls into question whether schemes are really using the full investment tool kit available.
Structured Equity has been playing a valuable role for schemes over the last 15 years, enhancing returns without compromising risk management. It provides exposure to equity markets with explicit protection against market falls, providing schemes with that icing on the cake to get their funding back on track.
As highlighted in my recent article (CDI vs LDI - can you have your cake and eat it too?), pension schemes can have their cake and eat it (please excuse the baking analogies, but GBBO 2020 is airing today)! By using bespoke Liability Driven Investment (“LDI”), all schemes can maintain more in growth assets and adopt higher levels of liability hedging without compromise.
This month with cake still on the brain (thanks Bake Off) I am turning my attention to the icing. The proverbial ‘icing on the cake’ for schemes using a bespoke LDI arrangement is the scope to use another investment solution - Structured Equity.
With a bespoke LDI approach, a scheme has their own portfolio of “collateral”, typically cash and UK government bonds, to support their LDI allocation. Schemes can also use this collateral for other purposes without compromising the level of liability hedging. One specific example is Structured Equity, which can sit alongside the LDI allocation. This is akin to the National Savings and Investment Guaranteed Equity Bonds issued in 2009. Investors received exposure to equity markets up to a capped level of return with a 100% guarantee the original investment would be returned, regardless of the market’s start and end levels.
When applying this approach for UK pension schemes, we can convert the return on your collateral for exposure to equity markets. This means generating more return for the scheme today, as well as providing explicit insurance should markets fall. The “icing” can then be tailored to your specific needs and preferences. For instance, trustees will decide where their priorities lie - capturing more exposure to equity markets rising or increasing against falls in the market?
R&M pioneered the use of Structured Equity to deliver a smarter, more tailored solution for our clients. So popular is this approach that clients use it again and again with some schemes on their tenth iteration.
Our interactive structured equity tool (see video) brings the topic to life. We find this enhances the learning experience and makes the design process accessible to trustees. Ultimately, accessibility is a key point – our bespoke structured equity solutions cost far less than traditional active equity funds and are available to schemes as small as £10m
If you'd like to hear more about adding some icing to your cake through Structured Equity, please get in touch.
"R&M pioneered the use of Structured Equity to deliver a smarter, more tailored solution for our clients."
This article constitutes a financial promotion and has been issued and approved by River and Mercantile Solutions, a division of River and Mercantile Investments Limited which is authorised and regulated in the United Kingdom by the Financial Conduct Authority and is a subsidiary of River and Mercantile Group Plc (registered in England and Wales No. 04035248).
Please note that this communication is directed at, and intended for, the consideration of Professional clients only. Retail clients must not place any reliance upon the contents.
“The decade of delivery” – the Fiduciary Manager’s role in combatting climate change
“The decade of delivery” – ...
A year into what the UN has called the ‘decade of delivery’ for its 17…5 min read