Liability-driven pension investment increases to £446bn

Liability-driven pension investment (LDI) increased by 11% in 2012, according to research by KPMG Investment Advisory.

The KPMG 2013 LDI survey, which questioned 30 institutional managers, found that LDI now covers £446 billion of pension liabilities, with 686 UK pension scheme mandates now employing LDI.

However, the provision of LDI remains dominated by three providers (Legal and General, Insight and Blackrock) which, combined, control 90% of the market based on notional value.

The research also found that these three providers dominated the pooled funds market, although here it was less marked because they accounted for a combined 61% of notional liabilities hedged.

The survey also found:

  • The strongest growth has been in hedging inflation risks.
  • The LDI market has witnessed an increased 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 (pictured), said: “In an environment where cash is king, derivative-based strategies appear to be a popular way of controlling key risks while freeing up assets that can earn a premium invested elsewhere.

“The debate will no doubt rage on as to what the fair price for protection is and it’s unlikely that the average man on the street would look to buy at these levels.”