Small and medium-sized pension funds are coming around to liability-driven investment strategies, with pooled funds providing half the growth in the number of mandates last year as the LDI market exceeded the £500bn mark.
Consultancy KPMG’s annual LDI survey revealed the total liabilities hedged increased by £74bn to £517bn in 2013, a 17 per cent increase from last year. The number of mandates grew by 142 to 825, with half the additional wins for pooled funds.
LDI survey findings
The increase in liability hedging was shared equally between inflation and interest rate protection.
There was growth in the use of swaption strategies, with the notional exposure increasing £27.9bn from £17.7bn.
However, only 25 of the surveyed schemes currently use swaptions.
30% of existing mandates use triggers, down from 34% in 2012.
73% of managers believe legislative changes such as centralised clearing will be the key issues of 2014.
The dominance of segregated mandates in the past meant LDI was mainly restricted to larger schemes. The report concluded that the strong growth of schemes handing out pooled mandates, which rose to 372 from 304, confirmed the wider accessibility of the strategy.
Jonathan Crowther, head of UK LDI at Axa Investment Managers, said: “The ability to look for the most efficient way to hedge [liabilities] within the pooled fund itself is making it much more attractive and interesting for pension schemes entering the market.
“There are more innovative solutions around now for smaller and medium pension schemes.”
But only 21 per cent of mandates, by number, related to schemes with liabilities less than £50m. This confirms earlier reports that just one in 17 medium-sized pension schemes had adopted LDI or hedging strategies.
But Dan Mikulskis, co-head of asset and liability modelling at consultancy Redington, said¹: "Size by itself isn't the barrier to adopting it because there are some very good pooled products now... which can be easily accessible [to] the very small schemes."
But he added there were still governance hurdles to get over. “Generally, our experience is that the barrier to adopting it is the governance of the decision-making process of the client in question,” he said.
Competition grows
Asset managers Legal & General Investment Management, Insight and BlackRock, the LDI ‘big three’, remained the dominant providers with an 85 per cent share of liabilities hedged. But they only had a 72 per cent share of pooled LDI, down from 79 per cent in 2012, as competition intensifies among the smaller players (see graph).
Asset managers F&C and Schroders were the biggest beneficiaries of this trend – adding 17 and 19 mandates respectively – on a net basis. Barry Jones, head of UK LDI at KPMG, said: “In [the] pooled space it’s about having the best offering available for the market."
The “most innovative” managers have benefited in inflows, he said, adding: “The mid-sized players have had to be [innovative] to gain market share.”
The greater competition for pooled mandates has pushed providers to become creative and tailor strategies specifically to the needs of the pension scheme, consultants said.
¹The original version of this article misquoted Redington's Dan Mikulskis as saying: "Our experience is that size itself isn’t a barrier to adopting [LDI] because there are some very good pools which can be easily accessed or provide personal schemes.” The quote has been corrected and updated.
