| WH Smith takes the LDI turn |
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| 23/10/2005 | |
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The defined benefit pension scheme of WHSmith (WHSmith Pension Trust), whose deficit is expected to reach £94 million at the end of the year, adopted a Liability Driven Investment (LDI) managed by State Street Global Advisors last September. A LDI structure takes a scheme's liabilities as its main benchmark. The main objective is to mimic the liabilities' behaviour in order to avoid the formation of a deficit. "This involved the expected liabilities of the scheme being matched by assets that will alter in value as interest and inflation rates change, matching the movements at the same rate as the pension liability changes", stated WHSmith. DB schemes seek to mitigate downward risks through the use of LDI structures based on a combination of bond investments and interest and inflation swaps. Such a mix allows for fine tuning of the scheme's asset and liability duration as well as its cashflows. WHSmith said that its DB scheme had adopted this new investment policy "in order to limit the volatility in the underlying investment performance and reduce the risk of a significant increase in the deficit in the fund." Exposure to equities will allow the fund to continue benefiting from any potential higher returns in the equity markets, with an overall expected rate of return of 5.0% for 2005-2006. Overall restructuring The adoption of this investment policy has led to an overall restructuring of the assets in the investment fund. 94% of the fund's assets are now invested in the LDI structure. The remaining assets have been invested in a portfolio of long-dated equity call options representing a notional exposure to underlying equities of some £350m. In this respect, WHSmith's decision does not resemble Boots' 2001 move to an all-bond portfolio.Subsequently, Boots added interest rate and inflation-linked swaps to create a better match with the scheme's liabilities, giving a LDI bent to its investment strategy. The new arrangements also give WHSmith a better view of the level of future deficit reduction payments. The deficit fund agreement reached in 2004 has been replaced by a new one that will result in deficit funding payments of £15m in 2006/07, £20m in 2007/08 and thereafter increasing by the retail price index capped at 5% until the deficit is repaid. Some of the main providers of LDI solutions include Axa IM, Barclays Global Investors, State Street Global Advisors and Merrill Lynch. Smaller fund managers are also entering the field as the idea of LDI spreads its web throughout the pension community. J.L. |
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