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Surge in UK gilt yields exposes pension fund weaknesses
A decades long downward move in UK gilt yields has led to a fall in the interest rate used to discount future cashflows and increased the value of UK defined benefit pension fund liabilities. Many pension fund trustees, faced with the considerable risk that the value of assets held by funds would not increase commensurately, adopted liability driven investment strategies. These LDI strategies involve purchases of repo or derivative contracts, with the aim of matching liabilities as closely as possible with minimal risk. Since the lowest risk assets are government bonds, which cannot be expected to produce the returns ... (full story)