LPFA to sign up to net zero group, debates future of LDI

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The London Pensions Fund Authority said it has plans to sign up to the Institutional Investors Group on Climate Change Net Zero Asset Owner Commitment this month. Elsewhere, the fund is considering removing its liability-driven hedge. 
 
In March this year, the local authority fund said it would “proceed with steps to sign up to the IIGCC Net Zero Asset Owner Commitment during July 2021”. 
 
The fund is confident that it can provide an Investor Climate Action Plan within a year and will set up a small working group consisting of board volunteers to help with the development of the plan, its documents reveal. 
 
Last week, LPFA announced that it had signed up to CDP’s 2021 disclosure request across climate change, water and forests. CDP runs an environmental disclosure platform and according to LPFA holds the largest Task Force on Climate-related Financial Disclosures-aligned environmental database in the world. Local authority pension funds are expected to be consulted by the government on making TCFD disclosures later this year. 
 
The fund was among a number that received a letter from environmental pensions campaign group Make My Money Matter to set a robust net zero target, the group said on Thursday. Its chief executive Tony Burdon said defined benefit schemes “have extraordinary power to help tackle the climate crisis and protect savers’ investments, but many have yet to respond to growing demand for cleaner, greener pensions”. 
 

Discount rate changes and LDI 

 
The local authority fund will be undergoing a valuation next year but is currently also considering removing its LDI hedge, the documents show. 
 
It had received a report from actuaries Barnett Waddingham which outlined proposed changes to the discount rate structure. These changes “would contribute to either reducing the required size of the LPFA LDI hedge or reducing its effectiveness”. It said this is because the new strategic asset allocation would increase inflation-linked weighted assets, while the Local Pensions Partnership Investments credit fund “would now be deemed to be sensitive to inflation and recognition of the inflation risk premium would reduce the value of the liabilities”. 
 
The fund received advice from Redington on the matter which remains undisclosed, but during the investment panel’s discussion, chief investment officer of the LPP pool Richard J Tomlinson “cautioned that a 12.5% LDI hedge would have limited benefit and sought to clarify the intent to retain the LDI hedge, in its diminished size, given the total risk profile of the fund was low”. 
 
The LPFA may now seek advice from LPPI and asset manager Insight Investment on an implementation plan on how to reduce the LDI hedge over time.  
 
The fund’s chief executive Robert Branagh agreed to incorporate the panel’s debate and feedback on LDI into a board report, with the recommendation “to remove the LDI hedge over an appropriate period”, and to review the transition for March 2022 as part of the removal process. 
 

What are your thoughts on retaining, reducing or even increasing LDI?