What does the end of LIBOR mean for your investments?

You may have read lately about the end of LIBOR (the London Inter-Bank Offered Rate), which is being phased out by the end of 2021. It’s used to help determine interest rates on consumer and banking products – and it’s often used as a way to measure performance (called a benchmark) for certain types of investments.

Since the 1980s, trillions of pounds’ worth of financial contracts – including loans, mortgages, and credit cards – have been valued using the LIBOR rate. But over the years, a number of problems with LIBOR have come to light because of how it is determined. LIBOR’s an estimated rate and not based on actual transactions – that is, a small group of banks estimate what they’d charge other banks to borrow money overnight. Because of how it's set, the LIBOR rate is vulnerable to technological, regulatory, and ethical failings that could lead to an unfair rate.

That’s why in 2017, the FCA (the Financial Conduct Authority) announced that LIBOR would be phased out. The following year, heads of central banks like the Bank of England and the US Federal Reserve came together to urge the industry to find alternatives to LIBOR and begin planning for the transition.

How will these changes impact my investments?

Scottish Widows and our external fund manager partners have used LIBOR as a benchmark on a number of funds, often for absolute return and liquidity funds. We’re now in the process of removing this and arranging to use different benchmarks moving forward. For example, in the UK, one of the most commonly used benchmarks that will replace LIBOR is called SONIA (Sterling Overnight Index Average).

The new universe of bank rate benchmarks, such as SONIA, are determined using actual transactions to determine an accurate rate. This will help protect customers against the risks that LIBOR presented – from credit risk to the risk of unethical practices – by offering greater transparency and promoting trust in the market.

Additionally, our external fund managers will ensure that assets held by the funds do not reference LIBOR.

This change will be seamless and won’t impact the value of your investments, nor the way our funds are run.

Do I need to do anything?

No. All of the necessary changes will be made by our external fund managers and our investment team will be monitoring the transitions to the new benchmarks.