Stoxx could revive the use of structured products in the retirement market to improve the pensions deficit across markets and jurisdictions following the launch of the new iStoxx Riskfirst LDI index family, which were made live on April 23, and could be used as the basis for structured income plans aimed at UK retirement savers as an alternative to traditional schemes.
This new offering has been jointly developed with Riskfirst and the index provider. "Our focus was on developing a solution that not only serves as independent benchmarks for LDI (liability-driven investment) portfolios, but also that the indices are investable and liquid," said Muhammad Ashar (pictured), head of asset owners and consultants at Stoxx.
"We expect providers to follow and offer various implementation options for pension schemes," said Ashar. "We are, however, totally agnostic on whatever route the pension schemes decide to take for implementation - exchange-traded or institutional funds, mandates, derivatives or structured products. In the LDI space, structured solutions that involve derivatives are nothing new."
Stoxx will calculate a range of indices based on 12 profiles, capturing member type, duration, type of indexation (pre- and post-retirement), interest rate and inflation sensitivity and tax-free cash component of typical UK pension schemes.
Stoxx took the 12 building blocks created by Riskfirst and turned them into a suite of indices that can now be used as benchmarks but also as investable assets in index-linked products, according to Matthew Bale, chief strategy officer at the UK-based provider of risk analytics and reporting solutions to the defined benefit pensions market. "We have not developed this concept in a vacuum: we consulted with providers, consultants and asset managers," said Bale.
The LDI market for pension funds in the UK is approaching £1 trillion and there are no independent benchmarks to judge performance, and no way to compare the different providers nor an ability to calculate on a risk-adjusted basis how the different funds are performing, accordinng to Bale. "From a trustee perspective, these are factors that limit good governance," said Bale. Riskfirst covers 1,800 pension funds in the UK, and over 4,000 different benefit tranches from UK pension funds modelled up. "To put together an index pulling all those funds in combination to match any UK pension plan would need 12 profiles capturing different aspects to reflect their liability profile. The set of indices we have developed in partnership with Stoxx are a major leap forward, providing improved governance and increased accuracy in a cost-efficient solution."
At the development stage, Stoxx transformed the underlying building blocks into investable solutions by carefully addressing investability and liquidity concerns, according to Ashar. "In this instance, the data collected by Riskfirst is unique, in-depth and difficult to collect," said Ashar.
The expectation is for the new set of indices to be delivered through different wrappers "because they provide exposure to solutions that are very investor centric", according to Ashar. "The adoption of these indices for LDI mandates can become a trend over time, but it will depend on the uptake from product manufacturers, consultants and investors."
Stoxx remains the leading index provider for structured products by assets under management with its Eurostoxx 50 appearing in more than 3,000 tranche-based products in 2017 and worth an estimated US$25.7 billion, according to SRP data. Year to date, the European benchmark has featured in 888 structures across markets worth an estimated $8.8bn.
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