LDI struggling to penetrate medium and smaller-sized schemes
Liability-driven investment strategies are struggling to gain ground outside larger schemes, with regulatory data indicating just one in 17 medium-sized plans have implemented hedging strategies.
Institutional investment experts report that these strategies are beginning to make inroads outside the larger end of the market but barriers remain, including investment governance and lack of resources.
Consultants certainly recognise that taking [a] large amount of interest rate and inflation risk is pretty much unrewarded
A quantitative survey of 316 private sector defined benefit schemes, issued this week by the Pensions Regulator and research company IFF Research, found only 6 per cent of those with 100-999 members reported using hedging, including LDI, and just 1 per cent among schemes with fewer than 100 members.
This is compared with 22 per cent of large schemes (1,000-4,999 members) and 48 per cent of very large schemes (5,000-plus members). The data was based on investment services used in the year ending 2012, so these proportions could have increased as the LDI market has grown.
Simeon Willis, partner at consultancy KPMG, said there has been an increase in the number of small and medium-sized schemes using LDI. “There are more simple products that schemes can use that deal with the major part of this risk for them,” he said.
But he added the complexity of the overall strategy remained a stumbling block, added to the lack of time and resources available at smaller schemes. “All that leads to it taking longer for things like LDI to sink in,” Willis said.
Steve Barker, managing director at Barker Tatham Pension Investments, which specialises in consulting with smaller schemes on factoring their liability profiles into their investment strategy, said appropriate products are available, but smaller schemes are not being told where to look.
"A lot of the schemes that we have taken on have had no investment advice for the last 10 years," he said. Schemes might have been left invested in balanced mandates, they might have taken a DIY approach to liability matching, or in some cases they are getting unsuitable advice.
"Sometimes you get IFAs dealing with pension schemes where they are used to dealing with high net worth individuals," Tatham said. A giveaway would be a very small scheme invested in a "20 different retail funds", he added.
But Robert Pace, an product strategist at Legal and General Investment Management, the largest manager of these strategies in the UK, said the pro-LDI consensus among investment consultancies was driving take-up among smaller schemes.
"Consultants certainly recognise that taking [a] large amount of interest rate and inflation risk is pretty much unrewarded," he said. "They are certainly encouraging pension schemes to take a material amount of that risk off the table."
But Pace added the complexity of the strategies, the long lead time for schemes to adopt them, and in some cases the reticence of sponsors to adopt them could be keeping the market's growth in check.