Liability driven investment (LDI) had not been a focus for us until last week because we do not cover the companies that offer this service to pension funds. The market leaders are L&G (number one market share), Schroders, Blackrock, and Insight. We discuss in this note how a ‘black swan’ event in gilts pricing stressed funds and necessitated a £65bn buying programme. The sharp fall in the value of gilts on Monday 26th was outside the stress test range for defined benefit pension funds. The fall in gilt prices increased leverage ratios and led to margin calls, which pension funds struggled to meet, and that likely contributed to the selling of risk assets. The structuring of liability driven investing is similar to the approach that life companies with annuity books take in matching assets and liabilities. A key difference is that pension funds are not required to hold solvency capital and are not subject to the same liquidity stress tests as life companies. Hence, the consistent message we have had from our coverage (and some large life insurers we do not cover) is that liquidity has not been an issue for them, even where there have been collateral calls, and solvency, of course, has not been an issue. Unfortunately, no company has been willing to put a single number out there, perhaps reluctant to provide ‘one off’ information that then becomes another ‘stress’ point in the future. Life insurers are also big holders of risk assets that have got caught up in the broader sell-off, while rising bond yields also put pressure on Own Funds, even as they increase solvency ratios. Of our coverage, Aviva has a larger annuity book than Phoenix, supported by a broad range of assets, while Chesnara has very limited exposure, never having acquired an annuity book in the UK. Of total assets of £9.7bn at year-end (including unit-linked), less than 1% were immediate or deferred annuities. The broader questions, to our mind, are what has the impact been on risk assets in recent weeks, and what happens to gilt yields when the BOE’s emergency programme ends in two weeks’ time? How much will pension funds preparing for the ‘new normal’ impact risk asset prices in the near-term? To help answer these questions, we are pleased to host the head of investment at one of the UK's leading pensions consultants, Ben Gold of XPS, to explain how this happened, how liability driven investing works, how the industry will adapt, and risks and opportunities going forward. The call will be this Friday 10am. Please RSVP to noni.smyth@investec.co.uk or your salesperson if you would like to participate.