Endgame – the benefits of ‘buy and maintain’ credit

PDF HEADING DISCLAIMER – EXAMPLE – For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients) or This is a marketing communication. Please refer to the prospectus of the UCITS and to the KIID / KID before making any final investment decisions.
Wooden structure

Insights

Endgame – the benefits of ‘buy and maintain’ credit

Richard Ferris
Richard Ferris
Client Portfolio Manager, LDI

Due to higher gilt yields, many defined benefit pension schemes are now in a stronger funding position than they were a few years ago. To secure this improved status, schemes are looking to reduce investment risk by decreasing equity holdings and focusing on assets that will more likely provide the necessary cashflows to pay pensions. A buy and maintain (B&M) credit strategy, held alongside a Liability Driven Investment (LDI) portfolio, can be a crucial component of a low-risk investment strategy. This is true whatever the endgame strategy targeted by the scheme: buy-out, self-sufficiency, or run-on, for the following reasons:

  1. Enhanced Yield: investment-grade corporate bonds offer a higher yield than gilts, which are typically included in an LDI portfolio.
  2. Predictable Cashflows: corporate bonds provide predictable cashflows through coupon payments and maturity proceeds, with a maturing B&M approach ensuring these cashflows are delivered to investors rather than reinvested.
  3. Credit Selection: a B&M approach with rigorous credit analysis and flexible portfolio construction can lead to low turnover, stable credit ratings, and predictable outcomes.
  4. Cost Efficiency: B&M credit strategies usually incur lower transaction costs compared to active credit strategies, enhancing net returns for the pension scheme.
  5. End-game aware: for schemes aiming to insure their liabilities, a strategy dominated by LDI and credit should be well-aligned to annuity pricing. On the other hand, a strategy focussed on cashflow generation will be essential to schemes aiming for self-sufficiency or run-on.
  6. Risk Management: combining LDI and B&M credit portfolios allows for accurate interest rate hedging and better overall risk management.

Securing a stronger funding position

Funding levels have improved for many defined benefit pension schemes over the past few years, as higher gilt yields have reduced the present value of liabilities. Schemes are therefore looking to secure this stronger position and move towards the endgame.  Historically there have been two clear choices for the endgame of the defined benefit scheme: buyout – transferring the assets and liabilities to an insurer; and “self- sufficiency” – managing the assets under a low-risk investment strategy to continue to deliver the benefits without further recourse to the sponsoring employer.  The idea of a third approach has recently been introduced: “run-on”, where the scheme would continue to seek investment returns to create a surplus to be shared between the scheme and the sponsor.

Corporate bonds, carefully selected for holding to maturity, provide a predicable source of cashflows, protection against the interest rate risk of the scheme’s liabilities and an additional yield over gilts. Alongside an LDI strategy, an allocation to B&M credit has a number of attractive features to defined benefit pension schemes, whatever the scheme’s endgame strategy.

1. Enhanced Yield

In recent years, rising gilt yields have significantly improved the funding positions of many defined benefit pension schemes by reducing the present value of liabilities. This improvement allows trustees to transition from equity-heavy growth portfolios to more cashflow-focused assets. While many schemes have established LDI strategies to protect against interest rate and inflation risks, these often mainly include UK government bonds (gilts). Incorporating selected corporate bonds alongside the LDI portfolio can enhance interest rate risk reduction and cashflow generation, while also providing a yield advantage over gilts through the credit spread.

2. Predictable Cashflows

Bonds offer investors predictable cashflows via regular fixed coupons and a known terminal value if held to maturity. As pension schemes seek to meet future liability payments, the cashflows from corporate bonds are particularly valuable. Unlike traditional active or passive corporate bond funds that frequently trade to maintain a constant average maturity term, a B&M credit portfolio can be managed to maturity, ensuring all income and maturity proceeds are distributed to investors.

3. Credit Selection

At Columbia Threadneedle Investments, our investment approach emphasizes robust credit research, strategic portfolio construction, and comprehensive risk management. Our experienced team of credit research professionals collaborate closely, applying a proprietary process that yields a deep understanding of issuer and industry dynamics. This thorough research process allows us to identify suitable bonds for B&M credit portfolios, resulting in fewer historical downgrades and greater certainty of future cashflows.

4. Cost Efficiency

Frequent buying and selling of assets can significantly erode returns through transaction costs. By selecting bonds with the intention of holding them to maturity and distributing the proceeds, transaction costs can be minimised. A B&M approach leads to lower turnover and thus lower costs, contributing to better overall returns.

5. Endgame Aware

Many schemes are aiming for one of three types of end-game strategy: buy-out, self-sufficiency or run-on. For schemes aiming to insure their liabilities, a strategy dominated by LDI and credit should well-aligned to annuity pricing.  On the other hand, a strategy focussed on cashflow generation will be essential to schemes aiming for self-sufficiency or run-on.

6. Risk Management

A well-funded scheme will typically aim to hedge most of its liability interest rate and inflation risks through an LDI strategy. Since corporate bonds significantly contribute to the interest rate hedge, an allocation to B&M credit must be integrated into the LDI strategy. An integrated B&M credit and LDI strategy, managed by a single entity, ensures the most accurate hedging, as the LDI manager will have complete visibility into the B&M credit holdings in real time. Furthermore, the governance of LDI mandates has gained attention, especially regarding collateral calls. Positioning the B&M credit portfolio alongside the LDI portfolio allows for immediate asset access in case of yield rises. For segregated clients, the ability to raise cash through the “repo” of corporate bonds adds a further governance advantage.

In conclusion

By incorporating a B&M credit strategy with a robust LDI framework, defined benefit pension schemes can achieve a well-balanced, low-risk investment portfolio. This strategy not only enhances yields and ensures predictable cashflows but also manages costs effectively and maintains readiness for a range of end-game strategies, all with a focus on risk management.

Belangrijke onderwerpen

Abonneer op inzichten

Haal het meeste uit uw e-mails door deze te personaliseren en ontvang inzichten en informatie op basis van uw voorkeur.

Recente artikelen

Our fixed income team provide their weekly snapshot of market events.
A secure and consistent supply of critical minerals is fundamental to the energy transition and to achieving net-zero, but demand is putting pressure on supply chains and costs, and risks polarising sentiment around the energy transition.
Fears of an economic slowdown and helpful falls in inflation rates opened the door to the first rate cuts in the US and the UK, and for a second in Europe.
Share article
Belangrijkste onderwerpen
Gerelateerde onderwerpen

PDF

Endgame – the benefits of ‘buy and maintain’ credit

1 Source 1
2 Source 2
3 Source 3

Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk.  Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

Gerelateerde inzichten

8 oktober 2024

Rosa Fenwick

Head of LDI Implementation

Q3 2024 repo update

Fears of an economic slowdown and helpful falls in inflation rates opened the door to the first rate cuts in the US and the UK, and for a second in Europe.
1 augustus 2024

Ying Yi Lovick-Tee

LDI Portfolio Manager

LDI: Elections and market reform competing for attention

Our quarterly poll of investment bank trading desks on a range of topical questions helps support our narrative around market activity and outlook.
Read time - 6 min
22 juli 2024

David van der Stee

LDI Client Portfolio Manager, Investment Solutions

Marktvisie: Renteafdekking in de Solidaire Premieregeling

Wij verwachten dat pensioenfondsen in het nieuwe pensioenstelsel hun renteafdekking frequenter moeten bijsturen door de koppeling van de verwachte kasstromen aan het pensioenvermogen.
Leestijd - 2 min
8 oktober 2024

In Credit Weekly Snapshot – October 2024

Our fixed income team provide their weekly snapshot of market events.
8 oktober 2024

The climate risk ‘hot potato’– which sector will be left with burnt fingers?

A secure and consistent supply of critical minerals is fundamental to the energy transition and to achieving net-zero, but demand is putting pressure on supply chains and costs, and risks polarising sentiment around the energy transition.
8 oktober 2024

Rosa Fenwick

Head of LDI Implementation

Q3 2024 repo update

Fears of an economic slowdown and helpful falls in inflation rates opened the door to the first rate cuts in the US and the UK, and for a second in Europe.

Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk.  Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

Misschien vindt u dit ook interessant

Over ons

Miljoenen mensen over de hele wereld laten het beheer van hun geld aan Columbia Threadneedle Investments over. We beheren de beleggingen van particuliere beleggers, financieel adviseurs, vermogensbeheerders, verzekeringsmaatschappijen, pensioenfondsen en andere instellingen.

Fondskoersen en vergoedingen

Columbia Threadneedle Investments heeft een uitgebreid aanbod aan beleggingsfondsen, passend bij uiteenlopende doelstellingen.

Beleggingsbenadering

Uw succes staat bij Columbia Threadneedle hoog in het vaandel. De spil van onze ambitie om consequent successen te boeken voor onze cliënten is onze opvallend unieke beleggingsbenadering, waarbij vier beloften centraal staan.

Thank you. You can now visit your preference centre to choose which insights you would like to receive by email.

To view and control which insights you receive from us by email, please visit your preference centre.

Woman listens to music through headphones
Play Video

CT Property Trust- Fund Manager Update

Sed ut perspiciatis unde omnis iste natus error sit voluptatem accusantium doloremque laudantium

Bevestig nog een paar gegevens over uzelf om toegang te krijgen tot uw voorkeurencentrum

*Verplichte velden

Er is iets mis gegaan, probeer het alstublieft nogmaals

Dank je. U kunt nu naar uw voorkeurencentrum gaan om te kiezen welke inzichten u per e-mail wilt ontvangen.

Ga naar uw voorkeurencentrum om te bekijken en bij te werken welke inzichten u van ons per e-mail ontvangt.