United Kingdom

Details

  • Service: Tax, Pensions
  • Type: Press release
  • Date: 16/06/2014

LDI market breaks through the £0.5 trillion landmark in 2014 

  • The LDI market grew by 17% to £517bn of liabilities hedged at the end of 2013.

 

  • The “Big 3” managers (L&G, Insight and BlackRock) continue to dominate the market share, however the survey highlights that the other players are capturing the overall market growth.

 

  • KPMG expects 2014 to see continued growth in this asset class.

 

 

UK Liability Driven Investment (“LDI”) now covers £517bn of liabilities, a 17 percent increase over 2013 with 825 UK pension scheme mandates now employing LDI, according to the latest research issued by the investment advisory team at KPMG in the UK.

 

L&G, Insight and BlackRock continue to dominate the market with £441bn of liabilities hedged and 485 of the total 825 mandates.  Their share of the market has fallen slightly from 90% to 85% as the medium sized LDI firms have seen their numbers grow.

 

 

 

 

  

Barry Jones, Head of LDI at KPMG in the UK, said: “Despite bond yields trading at or around historic lows, pension schemes keep buying more LDI.  It feels like the London housing market where everyone keeps predicting the top of the market, but we just see more and more demand for it.  With many pension schemes looking to lock in the profits following another bumper year for equities, we’d expect another wave of de-risking in 2014 and the LDI market is likely to be the primary recipient.”

 

 

 

Key Headline Trends

 

 

The LDI Market smashes through the £0.5 trillion barrier

 

  • 2013 witnessed further rapid growth of the LDI industry. The number of LDI mandates increased by 142 to 825 and the total liabilities hedged increased by £74bn to £517bn.

 

  • With ongoing demand to de-risk, pension schemes looking to bank the gains from the continued equity market rally and 30% of existing mandates having triggers in place to extend further, KPMG expects this growth to continue into 2014 and beyond.

 

Mandate growth split evenly between pooled and segregated

 

  • LDI once was the domain of large pension schemes with the scale to enter into transactions directly with sell-side investment banks in segregated mandates.

 

  • By growth in number of mandates in 2013, around half was from pension schemes allocating into pooled LDI funds, confirming strongly that LDI is accessible for all pensions schemes.

 

Do the “Big 3” still dominate?

 

Yes, but…

 

  • Legal and General, Insight and BlackRock, the so called “Big 3”, remain firmly in place as the dominant providers of LDI in the UK, capturing 85% of the liabilities hedged. In segregated and bespoke pooled mandates, the “Big 3” make up 86% of the market and in pooled LDI mandates accounts for 72%.

 

  • Legal and General remain the largest LDI manager in the UK. They represent 44% of the UK LDI market, hedging a total of £228.6bn of UK pension scheme liabilities.

 

  • However, in pooled LDI, competition for business is fierce. When viewed from a perspective of mandate numbers, F&C are ranked number 2 and Schroders are only a fraction behind Insight and BlackRock.

 

Small schemes appear to be the slowest to adopt LDI

 

  • Only 21% of mandates relate to schemes with total liabilities below £50m. Whilst there appears to be plenty of opportunity for small scheme to access well structured and good value pooled vehicles, it seems that the demand from small schemes is much less than from larger schemes.

 

Growth in the use of “swaption” strategies

 

  • 2013 has witnessed a significant growth in use of swaptions [DEFINITION], with the notional exposure increasing from £17.7bn to £27.9bn.

 

Pension schemes have equal demand for hedging inflation and interest rates in 2013

 

  • Over 2013, the c.20% increase in liability hedging has been shared equally between inflation and interest rate protection. This bucks the trend from last year, where inflation hedging was the most in demand.

 

The fund management industry remains optimistic in its outlook. 

 

  • The majority of managers expect interest rates, real yields and expected inflation to rise above what is currently priced into the market in the next three years. However, we do know the market has ability to surprise even the most informed investors.

 

Tom Brown, head of investment management, at KPMG in the UK, said: “The established players have continued to bulk out their already impressive teams and invest further into systems and infrastructure. However, there continues to be a real push from the smaller players wanting to get in on the action. My expectation is that the battleground to win new mandates in 2014 will be vastly competitive.”

 

Navigating the UK LDI Market Report 

 

-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.

 

KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with approximately 11,500 partners and staff.  The UK firm recorded a turnover of £1.8 billion in the year ended September 2013. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 155 countries and has 155,000 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.  Each KPMG firm is a legally distinct and separate entity and describes itself as such.

 

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