Welcome to Money for the Rest of Us.

This is a personal financial show on money.

How it works, how to invest, and how to live without worrying about it.

I'm your host, David Stein, today's episode 407.

It's titled, Worry Free Retirement Investing.

Two weeks ago, in episode 405, we discussed how many UK pension plans were using liability

driven investment strategies.

These plans got into trouble because they went beyond trying to match their assets with

the liabilities, but instead used implicit leverage debt that is baked in to derivative

contracts in order to try to grow their assets.

When these derivative contracts fell in price, as interest rates rose, these UK pension

plans were forced to sell bonds, which caused those bond prices to plummet and the yields

or interest rates to spike.

interest rates got so out of hand that the bank of England had to step in and purchase bonds

in order to calm markets.

Liability driven investment in its simplest form is a sound concept.

It is at the heart of what insurance companies do.

They estimate what their payout for claims, such as in the case for life insurance, or

annuities, where they promise an ongoing payment to annuitants, they estimate what those

cash flows will be each year, and then develop an investment strategy, which mostly consist

of bonds so that the cash flow from their investments and premiums are sufficient each year

to meet the expected claims, and cash flow needs, including covering expenses, and so there's

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