Navigating the UK LDI Market

Navigating the UK LDI Market

By 2013 the number of LDI mandates increased by 142 to 825 and the total liabilities hedged increased by £74bn to £517bn.


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Navigating the UK LDI market

KPMG finds UK Liability Driven Investment (“LDI”) now covers £517bn of liabilities, a 17 percent increase over 2013 with 825 UK pension scheme mandates now employing LDI. 

Investment providers L&G, Insight and BlackRock continue to dominate the market with £441bn of liabilities hedged and 485 of the total 825 mandates. Their share of the market has fallen slightly from 90% to 85% as the medium sized LDI firms have seen their numbers grow.

Survey Highlights

The LDI Market smashes through the £0.5 trillion barrier.

  • 2013 witnessed further rapid growth of the LDI industry. The number of LDI mandates increased by 142 to 825 and the total liabilities hedged increased by £74bn to £517bn. 
  • With ongoing demand to de-risk, pension schemes looking to bank the gains from the continued equity market rally, and with 30% of existing mandates having triggers in place to extend further, KPMG expects this growth to continue into 2014 and beyond.

Mandate growth split evenly between pooled and segregated.

  • LDI once was the domain of large pension schemes with the scale to enter into transactions directly with sell-side investment banks in segregated mandates. 
  • By growth in number of mandates in 2013, around half was from pension schemes allocating into pooled LDI funds, strongly confirming that LDI is accessible for all pensions schemes.

Do the “Big 3” still dominate?

Yes, but…

  • Legal and General, Insight and BlackRock, the so called “Big 3”, remain firmly in place as the dominant providers of LDI in the UK, capturing 85% of the liabilities hedged. In segregated and bespoke pooled mandates, the “Big 3” make up 86% of the market and in pooled LDI mandates account for 72%.
  • Legal and General remain the largest LDI manager in the UK. They represent 44% of the UK LDI market, hedging a total of £229bn of UK pension scheme liabilities. 
  • However, in pooled LDI, competition for business is fierce. When viewed from a perspective of mandate numbers, F&C are ranked number 2 and Schroders are only a fraction behind Insight and BlackRock.

Small schemes appear to be the slowest to adopt LDI 

  • Only 21% of mandates relate to schemes with total liabilities below £50m. Whilst there appears to be plenty of opportunity for small scheme to access well structured and good value pooled vehicles, it seems that the demand from small schemes is much less than from larger schemes.

Growth in the use of “swaption” strategies

  • 2013 has witnessed a significant growth in the use of swaptions, with the notional exposure increasing from £17.7bn to £27.9bn.

Pension schemes have equal demand for hedging inflation and interest rates in 2013

  • Over 2013, the c.20% increase in liability hedging has been shared equally between inflation and interest rate protection. This bucks the trend from last year, where inflation hedging was the most in demand.

The fund management industry remains optimistic in its outlook.

  • The majority of managers expect interest rates, real yields and expected inflation to rise above what is currently priced into the market in the next three years. However, we do know that the market has the ability to surprise even the most informed investors.

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This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.

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