Smaller schemes are increasingly using liability-driven investment strategies as the number of pooled mandates powers growth in the market, research this week from consultancy KPMG has shown.
LDI strategies seek to match a scheme’s liabilities and derisk step by step as it moves closer to full funding. It was initially the preserve of large defined benefit schemes, but there are signs increasing numbers of smaller schemes are entering the market.
The total liabilities hedged reached £741bn in 2015, up £83bn on the year before.
Growth in LDI for small schemes
The number of LDI mandates grew to 1,287 in 2015, from 1,033 in 2014. Of these, three-quarters were pooled mandates, typically favoured by smaller schemes due to the lower cost.
Pooled mandates now make up 56 per cent of total LDI mandates, but only account for 9 per cent of the liabilities hedged. Simeon Willis, principal consultant and head of investment strategy at KPMG and one of the authors of the report, said take-up of LDI strategies was increasing among small and medium-sized schemes.
“Lots of smaller schemes are just taking time to get comfortable with what LDI is; we’ve seen a big growth in the pooled space.”
Despite this, Willis said he believed the market is still ripe for growth.
He pointed out there are roughly 6,000 DB schemes in the UK, and the survey shows that total mandates would account for less than a quarter of that number.
“Even if we recognise there are some people doing long duration bond investing… that leaves a big number [of schemes] who could be thinking about doing it in the next few years.”
Ashish Doshi, investment consultant at Xerox HR Services, said when pooled LDI was first launched, it required schemes to invest in numerous funds, each one covering a different part of the fund’s lifespan.
“They would have to hedge their five-to-10-year risk in one fund, 10-15-year in another,” he said.
This changed with the launch of ‘single profile funds’ about three years ago, which allowed schemes to invest in one fund, requiring less time and governance.
We’ve seen a big growth in the pooled space
Simeon Willis, KPMG
The next step, Doshi added, is bundling LDI together with growth assets to create a product offering both liability matching and growth potential.
“There’s now a move to look at pension schemes’ strategy as a single solution,” he said.
Alan Pickering, chair of professional trustee company Bestrustees, said LDI solutions may initially have looked expensive to smaller schemes, but costs have come down.
“With lots of these developments, the fixed costs bear no relationship to the money involved,” he said. “But now, the market is moving in a sensible direction and there are some solutions that will play into the small schemes space.”
He added that investment consultants were increasingly familiar with the LDI space, making the selection processes more streamlined.
Trigger jam
The survey showed no increase in the number of mandates using triggers, following a fall of more than 30 per cent for yield-based triggers in 2015.
Many schemes have been forced to reset their derisking triggers in recent years as persistently low yields meant they were unlikely to hit the levels needed.
Willis said: “My feeling is… the appetite has begun to ebb. Some new mandates might still have them, but the old mandates might have ditched them.”
Some trigger structures, such as funding level triggers or combinations of many types, grew in popularity, despite the lack of growth for triggers overall.
