Non-market Risks In Liability Driven Investment (LDI): Getting It Right

Liability driven investment (LDI) arrangements are legally complex. While they are often tailored to suit the requirements of individual schemes, there are a number of common legal issues which are critical to understanding and managing a number of risks in liability driven investment arrangements.

The Pensions Regulator requires Trustees to put in place the right governance and controls, and understand the risk they carry in their investment strategy.

Segregated LDI mandates and Pooled LDI funds are legally very different creatures. In segregated mandates, the Trustee will become the legal party to all relevant arrangements such as the IMA and all derivatives and repo agreements. In pooled fund arrangements, the Trustee will only have a direct relationship with the relevant fund entity. Non-market risks, such as counterparty credit risk, operational risk, compliance risk, legal risk are common to both – but in segregated mandates, it falls on the Trustee