- LDI grew 11 percent in 2012 to cover £446 billion of UK Pension Scheme liabilities, according to KPMG analysis
- Despite the increase in credible competition, the market continues to be dominated Legal & General, Insight and BlackRock, controlling 90 percent of the industry, finds KPMG
UK Liability Driven Investment (“LDI”) now covers £446bn of liabilities, an 11 percent increase over 2012 with 686 UK pension scheme mandates now employing LDI, according to the latest research issued by KPMG Investment Advisory.
But despite a number of fund managers entering the market, the provision of LDI remains dominated by the “big three” (Legal & General, Insight and Blackrock) which, combined, control some 90 percent of the market based on notional value.
Tom Brown, head of investment management, at KPMG in the UK, said: “Whilst the market continues to be dominated by the ‘big three’, growth has not been confined to them. Fund managers with both medium and large LDI businesses have added to their number of mandates over the year, although at the smallest end of the market the results were more mixed. And the fund management industry is optimistic about the future for LDI.”
The big three also dominated the ‘pooled’ funds market, although here it was less marked as they accounted for a combined 61 percent of notional liabilities hedged, according to KPMG’s analysis.
Outlook and key findings
According to KPMG, with continued volatility and uncertainty around the direction of interest rates as the world emerges from the financial crisis, removing uncertainty, where cost effective, and focusing on seeking opportunities for growth appears to be the focus for UK pension schemes. Other key findings from KPMG’s 2013 LDI survey include:
Barry Jones, head of LDI research at KPMG commented: “Pension schemes continue to look for ways in which to reduce funding level risk. In an environment where cash is king, derivative based strategies appear to be a popular way of controlling key risks whilst freeing up assets that can earn a premium invested elsewhere. This is why we have seen growth in both LDI and Synthetic Return Generating strategies over the last year.”
Barry Jones added: “35 percent of mandates have triggers to extend coverage, so we know there is demand for more hedging. Furthermore, with over 80 percent of LDI managers believing that their greatest source of new business will be from pension schemes new to LDI, the continued development of propositions by smaller LDI players looking to challenge the market appears fully justified. The question remains whether these players can take significant market share from the big three in the segregated space which accounts for the vast majority of LDI assets in the UK.”
According to KPMG, LDI is just one of the ‘tools in the toolbox’ to effectively manage pension scheme risk and should be treated holistically alongside longevity hedging, insurance solutions, benefit changes / liability management, funding strategies and volatility controlled growth strategies.
The survey indicates that the majority of the 30 institutional managers surveyed believe that yields will rise relative to what is priced into the market over the next three years. If true, pension schemes yet to implement LDI would benefit from waiting for yields to rise. Despite this expectation, pension schemes increasingly seem to be seeing low yields as the ‘new normal’.
Barry Jones concluded: “The debate will no doubt rage on as to what the fair price for protection is and it’s unlikely that the average man on the street would look to buy at these levels. However, for pension schemes the desire to de-risk remains, so we expect flows of money into LDI and long dated bonds as gains from equity markets are banked. Furthermore, formal trigger strategies, which cover 35% of LDI mandates, could create a ceiling for yields for the near to medium term future.”
The full survey is available here
For further information please contact:
Margot Cowhig, KPMG Corporate Communications
Tel: 0207 694 4246 Mobile: 07920 274856: firstname.lastname@example.org
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 over 12,000 partners and staff. The UK firm recorded a turnover of £1.8 billion in the year ended September 2012. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 156 countries and have 152,000 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.