How can small schemes get smart with LDI?

Mark Versey: LDI focuses on the gap between what you have got in traditional portfolios and what risks your liabilities are giving you on the other side. For smaller schemes, it has been a lot harder to get advice because it is generally expensive.

The onset of pooled vehicles is a really helpful opportunity for these schemes to get access without having to have bespoke mandates.

Howard Kearns: If you look at the large to medium-sized consultancies, they will have a lot of small clients and you can bet that many of those clients have got some fairly decent LDI portfolios in place. But there’ll be lots of small schemes that work the smaller consultancies, and I suspect the proportion of their clients that have got LDI structures in place is much lower.

So within small schemes, who you are advised by is probably going to heavily influence what you do.

Alan Gander: But what about the cost to smaller schemes? That was the only thing I thought: smaller schemes would not really get into LDI, because it does cost a fair amount.

Within small schemes, who you are advised by is probably going to heavily influence what you do

Howard Kearns, SSGA

Simeon Willis: It is the fear of the cost rather than the actual cost... the fees are very reasonable.

Kearns: There are a lot of small advisory firms that advise the smaller schemes, and we see some of those firms but there’s many that we don’t see.

Laura Brown: I have also noticed this. We have a very large number of very small clients in our book, and when we look at their asset allocations they do not tend to change much very often. So many of them will just have equities and gilts, and the strategy may have been like that for many years, without being changed much at all.

That does tend to give us the impression that perhaps they are not getting a lot of new advice or new ideas coming to the table. It does feel like the consulting costs of doing an LDI exercise are probably more of a concern from the expense perspective than the investment management fees.

Willis: Also, there is the trustee governance time for small schemes, because if you think of a layperson, there is a quantity of time that is taken to get to grips with all this stuff. And if you are managing a £10m scheme, then the amount of time allocated to work on that scheme will be proportionately less than a £1bn scheme.

So there are just fewer hours in the day for small schemes to spend, and that is where fiduciary management comes in. Trustees can ask themselves, ‘Have we got the governance to do this justice?’

If the answer is no, then the fiduciary model is the solution, but often the answer is yes and actually the trustees are very keen. There does need to be an acceptance that this does take a bit of time and effort, and I think the education or the responsibility sits with the trustees. Ignorance is not an adequate excuse. If you do not understand it, you need to take the steps that you are talking about to get to the level of understanding you need in order to make a sensible decision.

That is why you need specialist advisers with a trusted relationship where the adviser takes on the burden of some of that understanding, and it is just the high-level decisions that the trustee is making.

Brown: In terms of small schemes and their decision-making approaches and governance, I think perhaps timing is partly related to the fact that there are more solutions available in the market to help clients implement LDI more easily. In terms of the kind of difficulties of getting advice and the cost around that, I suppose it does relate to your fiduciary point a little, Simeon, in the sense that we see clients looking to tell us what they want to do and saying: ‘LGIM, please can you go away and do it.’

Ignorance is not an excuse. If you do not understand it, you need to take steps to get to the level of understanding you need

Simeon Willis, KPMG

Gander: Trustees just want to be happy that they have done something and it seemed the right thing to do and the most sensible thing to do.

Celene Lee: Education should not be a hurdle for them, because if you look at how many small schemes have invested in diversified growth funds with very, very complex asset allocation underlying it, they do not really try to understand all the relative value trades and so on. So now that we have got good products, easy access, good availability, not paying over the odds to access, I do not think education is really so much of a hurdle that we cannot overcome.

Gander: The only thing that worries me a little bit about the advice you get is: is LDI a bit of a gimmick? Is it just the thing that is in vogue at the moment? It is a bit like emerging markets. We had lots and lots of, ‘Oh, get into emerging markets, they are really, really cheap’, and you think: ‘They are quite dodgy. We do not want to get into that.’ Fortunately we did not, but if we had done, it would have been, ‘Oh, the market has gone down’.

Kearns: Well, you are using LDI for a different reason, aren’t you? It is not about the returns.

Mike Roberts: I do not think LDI is a gimmick. It was designed because there were issues with the length of the duration of liabilities versus assets and this was causing significant fluctuations in funding levels.

LDI was designed to fix that issue, and it was probably the first product that used a lot of swaps within pension funds, which had not been used extensively before. So it was quite innovative, and I think it is here to stay and will evolve.

This roundtable was chaired by Pensions Expert reporter Tom Dines