A new investment approach for pension schemes to us as a practical alternative to liability drive investment (LDI) has been developed by Lane Clark & Peacock (LCP).

The 'equity-linked' bonds strategy would see investments into gilts to match liabilities, and in equity futures to maintain a scheme's exposure to assets which deliver higher returns. LCP said equity futures are an attractive option as they do not require full funding upfront, leaving the remainder to instead be invested in matching assets such as fixed and index-linked gilts.

The bond uses established techniques and instruments to operate, and few restrictions fall upon this type of investment meaning schemes of all sizes should be able to implement the strategy.

"Equity-linked bond investment can be used to reduce pension scheme investment risk while retaining outperformance potential," commented Gavin Orpin, head of trustee investment consulting at LCP. "The approach retains many of the positive aspects of the LDI strategy, but is simpler and may be more cost-effective in current markets than a swaps-based solution.

"Concern about rising pension scheme deficits has never been higher, which is why several clients have been implementing this strategy, which typically outperforms equity markets when liability values are increasing."

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