KPMG survey: LDI market remains dominated by three fund managers

UK Liability Driven Investment (LDI) market remains dominated by BlackRock, Insight and Legal&General as it grows 11% to nearly £1/2trn of liabilities hedged in 2012, KPMG survey finds.

KPMG survey also shows that:

• LDI grew 11% 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% of the industry.

UK LDI market now covers £446bn of liabilities, an 11% increase over 2012 with 686 UK pension scheme mandates now employing LDI, according to the latest research issued by KPMG Investment Advisory.

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% 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% 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:

• With 35% of mandates having extension triggers in place, any yield reversion should see the industry witness significant growth

• Given the macro environment and record low nominal yields, it follows that the strongest growth has been in hedging inflation risks

• The LDI market has witnessed increasing appetite for pension schemes to use wider derivative strategies to capture return seeking exposures such as equity and credit to drive returns as well as hedge risks

• 80%of LDI managers believe their greatest source of new business will be from pension schemes new to LDI

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.”

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’.

To read the full report click here: [asset_library_tag 6745,2013 KPMG LDI Survey]

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