Liability driven benchmarks for UK defined benefit pension schemes

Document description

This paper considers liability driven benchmarks for UK defined benefit pension schemes. We define a liability driven benchmark as an investible portfolio of assets constructed to closely match the expected liability cash flows of a pension scheme and minimise investment risks. This paper does not consider in detail wider investment strategy issues, including long term unconstrained mandates and dynamic asset allocation strategies. We consider the background to liability driven benchmarks for UK pension schemes and the reasons why pension scheme trustees might adopt this kind of benchmark. We discuss current market practice and different approaches to setting liability driven benchmarks, focusing on an example of a closed scheme with pensioner liabilities. We describe the practical issues faced in implementing a mandate of this kind, including the use of over-the-counter derivatives such as swap contracts. Finally, we briefly consider broader issues including extending liability driven benchmarks to active and deferred member liabilities, and active investment management against a liability driven benchmark.