A banker who helped to design the pension investment strategy that nearly collapsed last week said it was not designed to withstand the ‘ferocity’ of the gilt market sell-off that pushed it to the brink.
Dawid Konotey-Ahulu, one of the architects of liability-driven investing (LDI), defended the strategy and said it had ‘helped stabilise pension funding over the past two decades’.
LDI funds linked to millions of final salary retirement schemes teetered on the brink of default after a bond market sell-off in the wake of Kwasi Kwarteng’s mini-Budget.
Shocked: Dawid Konotey-Ahulu, one of the architects of LDI, defended the strategy and said it had ‘helped stabilise pension funding over the past two decades’
That prompted a £65billion intervention by the Bank of England to stabilise the market in UK bonds, known as gilts.
Konotey-Ahulu was part of a team at US bank Merrill Lynch that developed LDI in 2003. He later founded investment consultancy Redington.
The idea behind LDI was to ‘immunise’ final salary pension schemes against big movements in interest rates and inflation, Konotey-Ahulu told the Financial Times in an interview.
But turning to last week’s chaos, he added: ‘What happened was the gilt market got hit by the equivalent of a category-four hurricane and the LDI system wasn’t built to withstand a weather system of that ferocity.’
Konotey-Ahulu said that until last week, LDI had ‘worked like a charm’ for pension funds and helped ‘provide a future for millions of members of defined-benefit funds’.
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