ABSTRACT
In this chapter we provide a basic outline of the legal and governance structures pertaining in the UK and Ireland, and then focus on pension fund investment. The challenges facing pension systems are discussed and analysed. The factors driving pension fund requirements include: asset choice; cash flow, regulatory and liability issues; trustees’ attitude to risk; time horizons and market uncertainty. For defined benefit schemes, defining the investment objective is complex. Key factors are the scheme’s liabilities and actuarial discount rate. Trustees of defined contribution schemes must focus on the return/risk profile of individual members’ pension pots. Usually members are offered a ‘default option’, which is a fund or funds selected by the trustees into which member contributions are paid where members do not select their own funds. Trustees of defined benefit schemes must identify their investment objectives and define the investment strategy of the fund. The investment mandate is the key document in the relationship between trustees and the investment manager. Asset liability modelling is a quantitative approach to the determination of an appropriate investment strategy and benchmark asset mix. Liability-driven investment (LDI) seeks to set up a dynamically managed portfolio which has interest rate and inflation risk/return characteristics that can eliminate the interest rate and inflation rate risks of the liabilities.
