Pension LDI and Claude AI: Liability-Driven Investing, Duration Matching, and Funding Ratio Analysis (2026)

Liability-Driven Investing: The Framework

Liability-Driven Investing (LDI) is the dominant investment strategy for defined benefit (DB) pension schemes. Rather than maximizing absolute returns, LDI focuses on managing the funding ratio — the ratio of assets to liabilities — by aligning the duration and inflation sensitivity of the asset portfolio with the characteristics of the pension liability. The UK 2022 LDI crisis, triggered by the rapid gilt yield spike following the Kwarteng mini-budget, demonstrated how critically the duration match, leverage levels, and liquidity buffers matter in LDI portfolios. Since then, tighter guidelines on LDI leverage and collateral buffers have reshaped the strategy for many UK schemes.

Claude is useful in pension LDI work for the analytical layer: explaining duration matching mechanics, structuring funding ratio sensitivity analyses, drafting investment strategy papers for trustee review, analyzing actuarial valuation outputs, and building scenario frameworks for the investment consultant's quarterly review. The quantitative liability data comes from actuarial valuations; Claude structures the analysis and drafts the documentation.

Funding Ratio and Liability Duration Analysis

• "LDI funding ratio sensitivity analysis: Our DB scheme has the following position as of June 2026. Assets: £425M (LDI portfolio £280M in gilts + gilt repo, growth assets £145M in diversified fund). Actuarial liability (technical provisions): £398M (funding ratio 106.8%). Liability modified duration: 18.5 years (very long-dated scheme, most pensioners are under 50). Interest rate hedge ratio: 72% (hedging 72% of liability duration with gilt positions). Inflation hedge ratio: 65% (RPI-linked gilts). Run a funding ratio sensitivity analysis showing: (1) impact of a +/-100bps parallel shift in gilt yields — what happens to asset values and liability values separately, and net funding ratio impact, (2) impact of +/-25bps in RPI inflation assumption, (3) combined stress (rates +100bps, inflation -25bps, growth assets -15%), (4) what interest rate hedge ratio would reduce rate sensitivity to ±3% funding ratio per 100bps move."
• "Liability cash flow profile: We need to present our scheme's liability cash flow profile to trustees as part of the LDI strategy review. Our actuary has provided these approximate benefit payment projections (£M): 2026: £18M, 2027: £19M, 2028: £20M, 2029: £21M, ..., 2035: £28M, ..., 2045: £32M, ..., 2055: £22M, ..., 2065: £9M. Discount rate: gilts + 0.5%. Calculate: (1) present value of each cash flow using the liability discount curve, (2) duration contribution by year bucket (0-5y, 5-10y, 10-20y, 20y+), (3) the weighted average duration of the total liability cash flow stream, (4) how much of the liability is inflation-linked (assume 70% is RPI-linked). Format as a trustee presentation table."

LDI Portfolio Construction and Hedge Ratio Optimization

• "LDI hedge ratio decision framework: Our scheme currently has an 80% interest rate hedge ratio and 70% inflation hedge ratio, implemented using physical gilts and gilt repo. The investment consultant is recommending increasing both to 90%/85%. Arguments for increasing: (1) funding ratio is at 106% — protected upside; (2) sponsor covenant has weakened (rating downgrade); (3) trustees are targeting buyout in 7 years. Arguments against: (1) gilt yields near cycle highs — locking in duration at current rates reduces upside if yields fall; (2) gilt repo leverage creates collateral buffer risk (post-2022 lessons); (3) growth asset allocation would need to fall to fund the additional LDI allocation. Write the investment strategy paper for trustees covering: the rationale for the current hedge ratios, the consultant's case for increasing, the counterarguments, and a recommended decision framework that the trustees can use to evaluate the trade-off."
• "LDI post-2022 collateral buffer adequacy: Following the 2022 LDI crisis, the Pensions Regulator requires LDI funds to maintain collateral buffers of at least 250-300bps of rate movement before forced deleveraging. Our scheme: gilt repo leverage ratio 1.8x, collateral buffer of 320bps (currently passing the TP threshold). Scenario analysis: if gilt yields rose 400bps rapidly (replicating October 2022 conditions), what would happen to our portfolio? Show: (1) yield rise impact on gilt mark-to-market loss, (2) repo margin calls at each 100bps interval, (3) at what yield level the buffer is exhausted and forced selling would begin, (4) the maximum leverage ratio we could carry while maintaining the 300bps buffer."

Pension Actuarial Valuation Interface

The triennial actuarial valuation is the process by which a DB scheme's funding position is formally assessed and the recovery plan agreed with the Pension Protection Fund (in the UK) or PBGC (in the US). The actuarial report is the primary document driving investment strategy decisions, and understanding its assumptions is essential for investment committees and trustees.

• "Actuarial valuation assumption sensitivity: Our triennial valuation uses these key assumptions. Discount rate: gilts + 0.5% (current yield curve-based). Mortality: CMI 2021 model, long-term improvement rate 1.25%. RPI inflation: 3.0% long-term. Salary escalation: RPI + 0.5%. Show the funding ratio sensitivity to each key assumption: (1) what if the discount rate is gilts + 0.25% (i.e., 25bps less favorable) — what is the liability increase and the funding ratio impact? (2) What if long-term mortality improvement is 1.5% instead of 1.25% — i.e., members live longer? (3) What if long-term RPI is 3.25%? (4) Which assumption has the largest single impact on our technical provisions? Current technical provisions: £398M, assets: £425M."
• "Recovery plan funding projection: Our scheme is currently 93% funded on a technical provisions basis (assets £420M, technical provisions £452M, deficit £32M). The sponsor has agreed a recovery plan of £4M/year for 8 years. Assuming the LDI portfolio earns gilts + 0.5% (matching the liability discount rate) and the growth portfolio earns gilts + 2.0%, project the funding ratio over 8 years showing: (1) asset growth from both contributions and investment returns, (2) liability growth at the discount rate, (3) annual funding ratio, (4) expected funding ratio at end of recovery plan, (5) sensitivity to growth portfolio underperforming by 1% per year."

Buyout and Buy-in Preparation

For schemes targeting insurance buyout or buy-in — the transfer of pension liabilities to an insurer — the preparation involves narrowing the funding gap on an insurer pricing basis (which is typically more conservative than technical provisions) and presenting a clean, well-documented scheme to insurers. Claude helps draft the preparation analysis and trustee communications.

• "Buyout gap analysis: Our scheme is 107% funded on technical provisions (TP) basis. Insurer pricing basis typically requires: (1) higher discount rate margin (gilts flat vs. gilts + 0.5% for TP), (2) more conservative mortality assumptions, (3) additional expense loading. Estimate the buyout basis funding ratio: (1) recalculate liabilities at gilts flat discount rate — approximate using our liability duration of 18.5Y to estimate the PV impact of removing the 50bps TP spread, (2) mortality loading adjustment — assume +5% liability increase for more conservative mortality, (3) expense loading — add 2% of liability. What is our estimated buyout basis funding ratio and deficit? What asset value would we need to achieve 100% on buyout basis?"

Related Tools and Resources

For pension actuaries, investment consultants, and trustees, the Insurance & Actuarial category includes IBNR calculation, reserve adequacy review, and actuarial report drafting tools. For broader pension accounting including ASC 715 and IAS 19 disclosure, see Pension Accounting AI. The Fixed Income AI guide covers the duration, convexity, and yield curve analysis that underpins LDI portfolio management.