The firm’s first LDI survey launched today also revealed the upward trend in this market will continue as key findings show;
Growth which was initially driven by medium and large schemes is now flowing to smaller schemes who can now take advantage of more accessible and affordable solutions to hedge interest rate and inflation risk
41% of new mandates for 2017 came through platforms and fiduciary management, which provide a means for schemes of any size to hedge their liabilities.
The average value of liabilities hedged across new mandates in 2017 was £195m, compared to £495m for existing mandates at the start of the year.
Pooled LDI solutions account for 87% of new mandates in 2017, reflecting the growing number of small to medium sized schemes beginning to hedge.
These findings support the position that hedging liabilities continues to be an area of growth, with the number of new mandates in 2017 increasing 17%. Even though gilt yields ended up where they started in 2017, yields fluctuated by 10-15 bps on a weekly basis, equating to a 1-3% movement on the liability value for a typical scheme. Waiting for a bargain buying opportunity is likely to disappoint as attractive pricing will only arise when the necessity for most schemes to protect against downside risk falls away.
Simeon Willis, Chief Investment Officer at XPS Pensions Group said: “Waiting for a gilt buying opportunity is fine if you can afford to take the risk but it is a very dangerous game and is why LDI is integral to UK pension scheme risk management. Growth in new mandates is showing no signs of slowing, with 312 implemented in 2017 equating to an extra £61bn of total liabilities hedged by LDI strategies.
“We are seeing quite a shift in where growth is being driven from, initially it was the larger schemes who had access to the more complex investment strategies but as new solutions are coming to the market to make LDI more accessible and affordable, we are seeing more small to medium pensions schemes taking advantage.”
Simeon added: “We saw most LDI providers continue to add to their tally of total mandates over 2017, with pooled LDI being the main force of growth accounting for a whopping 271 of the 312 new mandates. This is as a result of more small to medium sized schemes beginning to hedge as fiduciary managers and platforms offer clients easy access to fund managers’ products.”
Simeon concluded: “Whilst no-one knows the direction of markets, what we do know for sure is that LDI will smooth out the lumps and bumps, freeing up pension scheme investors to focus on the complex task of earning a return. When LDI is done correctly it is highly effective and as accessibility is improved more schemes are seeing the results of this. Contrary to some views out there, we believe there is still scope for further growth and waiting for a bargain buying opportunity is likely to disappoint as it will only arise when the necessity falls away - which will be too late.”
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