Key Findings of KPMG Liability Driven Investment (LDI) Survey:
- The number of LDI providers has fallen from 23 in 2007 to 15 in 2010 with the number offering pooled solutions falling from 14 to nine.
- Considerable concentration of overall industry assets across an ‘oligopoly’ of the three largest providers in both segregated and pooled assets.
- Regardless, levels of choice have actually broadened compared to 2007, due to greater variety of solutions available at the remaining managers.
UK pension funds are choosing to spread their liability matching assets across a very small number of fund managers, according to research issued by KPMG’s Investment Advisory Group.
The 2011 KPMG LDI Survey highlights that this is leading to a significant concentration of providers in the LDI market. Despite this, there is still healthy competition and a burgeoning array of LDI solutions available; however KPMG warns that this could change if the number of providers declines further.
The survey has looked at the development of the market in which investment managers use swaps and long term bonds to hedge interest rate and inflation risks, and accounts for the management of over £240bn of UK pension scheme assets.
Simeon Willis, principal consultant in KPMG’s Investment Advisory Group, commented: “Over the last three years we have seen substantial consolidation in the number of managers operating in the LDI market place. There is now something of an oligopoly operating under which just three fund managers are looking after the lion’s share of assets in both the pooled and segregated categories. Whilst the industry assets under management have continued to grow, the number of providers has reduced by around a third. The popularity of the largest LDI providers is having a compounding effect leading to concentration in a small number of managers.”
The survey highlighted that in segregated arrangements where the assets are managed on a bespoke basis, two managers accounted for more than 70% of the total assets under management. This figure was even greater within the pooled LDI fund space where two managers accounted for 80% of the assets under management.
Whilst the survey has highlighted the consolidation in the market, greater variety in types of fund and approach mean a wide range of schemes now have access to sophisticated approaches previously only available to the largest of schemes.
Simeon Willis continued: “We do not believe that the current concentration is hindering competition as there are a good range of alternatives in the market. However there is a possibility that this will become more of an issue if more providers withdraw in the future.”
UK pension funds are increasingly focussing on LDI strategies to better match their liabilities and to reduce volatility of their funding level. Over 20% of the 600 LDI mandates covered by the survey employ some form of market level trigger that is monitored and implemented by the investment manager. This highlights that a large number of pension schemes wish to hedge their liability risks, but not at current market levels.
Tom Brown, European head of investment management at KPMG, commented: “Investment managers are responding to growing client demands by offering increasingly flexible and tailored solutions given the market place is so competitive, and there are currently a number of clear leaders in the market. We are seeing a continuing trend for pension schemes to adopt a plan for reducing risk over time which may lead to a more even split of LDI assets across fund managers.”
- Ends -
For further information please contact:
Margot Cowhig, KPMG Corporate Communications
Tel: 0207 694 4246 Mobile: 07920 274856: margot.cowhig@kpmg.co.uk
KPMG Press Office: 0207 694 8773
Notes to editors:
About the report
KPMG surveyed the investment management community to establish a clear picture of the current landscape for Liability Driven Investment (LDI) in the UK pensions market.
Responses were received from 32 UK based investment managers with a combined asset base of over £6 trillion.
About KPMG Investment Advisory
KPMG Investment Advisory is a leading specialist advising pension schemes and other institutional investors in relation to asset and liability risk management.
KPMG has been at the forefront in developing clients’ understanding of the benefits that an LDI approach can bring, and helping clients to understand and implement the approach that is most suitable for them. The team is deeply experienced in integrating LDI and other investment solutions and continue to develop the most appropriate arrangements for our clients’ needs.
About KPMG LLP
KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with nearly 11,000 partners and staff. The UK firm recorded a turnover of £1.6 billion in the year ended September 2010. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 150 countries and have more than 138,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. KPMG International provides no client services.
