Collateral damage - Building a safety net

By incorporating leverage, liability driven investment (LDI) strategies have assisted pension schemes in managing the competing capital requirements of hedging liability risk and generating returns to reduce deficits.

By incorporating leverage, liability driven investment (LDI) strategies have assisted pension schemes in managing the competing capital requirements of hedging liability risk and generating returns to reduce deficits. The drawback of leverage is it introduces a new requirement for pension schemes: maintaining adequate collateral reserves.
 
In event of a severe market move and depletion of the collateral reserves, a call for additional collateral may need to be met within a short time horizon.

In this paper, we describe:

• Why implementing an effective plan to deal with calls for additional collateral as they fall due is so important
• What attributes make an asset attractive for use if there is a call for more collateral
• How we believe absolute return bond strategies, combined with flexible governance, can play a vital role in achieving effective collateral management.