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Tailor-made LDI rising in popularity with UK schemes

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  • Tailor-made LDI rising in popularity with UK schemes

UK - Tailor-made liability-driven investment (LDI) approaches are growing in importance for mid-market pension funds in the UK, according to Aon Hewitt, with a survey saying 40% of schemes are likely to increase their exposure to such strategies.

According to the consultancy's mid-market pension fund survey, covering schemes between £10m (€12m) and £500m in size, nearly 60% of funds also anticipate a shift away from domestic equity exposure, with around 45% planning to reduce the size of their global equity investments.

Examining fixed income strategies, the survey also found that corporate bond portfolios were more likely to see their allocations rise, with 34% planning to do so compared with 28% of respondents having such plans for their sovereign bond allocation.

However, discussing the rising interest in LDI strategies, principal consultant John Belgrove said it had come far since being in its "infancy" a decade ago, when only large pension funds adopted the strategy.

"It is now an established core strategy, and has become a capability offered by many specialist fund managers," he said.

"In a low-yield environment, entry timing remains a challenge, but while early adopters have fared well, our research suggests small and medium-sized pension schemes are now benefiting from the lessons learned by the pioneers of LDI.

"Increasing levels of liability-matching assets, decreasing equity allocations and diversification into alternative return-seeking assets - all combined with a greater appetite for asset allocation agility - remain deep structural trends for DB schemes."

Aon Hewitt's survey underlined the increased interest in matching assets by noting that 42% of respondents planned to increase investments in index-linked sovereign debt, while a similar amount intended to allocate additional assets to tailor-made LDI approaches through LDI funds.

The trend is confirmed by figures from KPMG, which earlier this year reported that while the overall number of LDI mandates was not on the rise, assets under management within existing mandates had risen by nearly a third.

Meanwhile, State Street Global Advisors, recognising the importance of the tailor-made market, recently announced plans to target small pension schemes with such a fund approach.

Belgrove said schemes' focus on LDI was impressive "given the severe headwinds" facing most funds, which he said had led to many to conclude a shift in asset allocation was too expensive.

"It indicates that most medium-sized schemes remain focused on their longer-term goals and are continuing to seek sensible opportunities to de-risk rather than be distracted by short-term market turbulence," he said.

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