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Asset-Liability Driven Investment Strategy
If a boat is blown off course in the middle of the ocean, the captain has the time and space to assess how far off course they have been blown and to determine what new course needs to be set - the captain is not overly concerned. However, when the boat is approaching port at the end of the journey, the captain is rightly cautious of the risk of being blown off course and onto the rocks. While there are clearly differences between a boat and its captain and a final salary pension scheme and its trustees, there is the same need for planning for the risk of being blown off course as the journey nears its end.
Liability Driven Investment is all about clearly identifying the funding risks a scheme is taking on both the liability and asset side, which become very real and significant as a scheme matures, and planning how to mitigate those risks sensibly. This covers investment strategies to mitigate the liability risks of interest risk and associated inflation risk, and also strategies to improve the risk vs. return profile of the scheme’s growth seeking assets.