Legal & General Investment Management launches flexible pooled LDI platform
UK - Legal & General Investment Management (LGIM) has launched a new pooled liability-driven investment (LDI) platform designed to offer smaller UK pension schemes some of the flexibility of the bespoke structures used by larger pension schemes.
Matching Plus enables clients to separate inflation and interest rate hedging decisions, choose from a broad range of complementary return-seeking assets and easily switch between those return seeking assets as the scheme funding position evolves.
LGIM claims that it offers better transparency and a more flexible and tailored option than existing pooled LDI products.
LDI product specialist Michael Walsh said: "Flexibility is the key - that's where smaller schemes struggle. There's no one way to do LDI.
"Ten years ago, the portfolios of UK pension schemes looked pretty similar, but since then we have seen marked divergence as they have found themselves in different positions with regard to funding levels, inflation exposure, whether or not they are closed to new accrual, and so on. That leaves them with very different objectives."
The new platform offers eight different sets of 'Maturity Buckets', which would constitute the liability-matching part of a scheme's solution.
These are portfolios of liability-matching swaps maturing in 2015, 2020, 2025, 2030, 2035, 2040, 2050 and 2060, alongside collateral in the form of LGIM's Sterling Liquidity Fund.
Different levels of leverage are offered for Buckets with different maturities, from five-times in the 2015 Bucket to zero leverage in the 2050 and 2060 Buckets.
Each of these sets of Maturity Buckets is split into three options. Clients can buy the 'Fixed' Bucket, which hedges only interest rate exposure; the 'Real' Bucket, which hedges both interest rates and inflation exposure; or, in what LGIM describes as an innovation, the 'Inflation' Bucket, which holds inflation swaps only.
Michelle Darracott, head of strategic development in LGIM's solutions group, said: "Clients may well not want to lock in today's low interest rates, but at the same time, they might consider today's inflation rate attractive.
"They can hedge inflation only in the short term with the Inflation buckets, and move into the Real buckets over the longer term as interest rates rise."
The Sterling Liquidity Fund that collateralises the swaps targets seven-day LIBID, so in itself it will not be sufficient to pay the swaps' LIBOR funding in the event that interest rates end up lower at the maturity date.
LGIM notes that the use of this fund "future proofs" the platform against potential regulatory changes that could see swap transactions moving toward central clearing and a requirement to use standardised collateral. But it also points to the advantages of separating the liability-matching and return-seeking functions of LDI.
The leverage available on the Maturity Buckets out to 2040 means the client need only commit £20-33 to the Sterling Liquidity fund for every £100 of liabilities it wants to hedge.
The remaining £67-80 can then be invested in return-seeking 'Asset Buckets', either to target the LIBOR return required to fund the 'Maturity Buckets' or to achieve a return in excess of LIBOR to close a funding gap.
The flexibility of the new platform's Asset Buckets is a vital innovation, LGIM argues, as it begins to take account of the diversity of funding positions and risk appetite among the targeted client base, as well as the potential for those positions to evolve over time.
The Asset Buckets on offer range from LGIM's Libor, Libor Plus fund and Sterling Liquidity funds, for those well-funded schemes that wish to take very little investment risk, through Single Stock Inflation Linked Gilts, Passive Gilts, Passive or Active UK Credit, European, US or Global Credit, to Diversified Growth and Global Equities.
Clients can choose any one of these Buckets or 'pick-and-mix' their own portfolio, changing its composition as funding or risk appetite evolves.
Moreover, Darracott described Matching Plus as an "open architecture-style structure", so clients can choose to retain their existing asset managers instead of or in addition to the options in LGIM's Asset Buckets.
Separating the liability-matching and return-seeking functions within a pooled platform has two advantages, LGIM argues.
By removing the LIBOR-plus assets from the liability-matching Maturity Buckets, Matching Plus enables clients to isolate the value of their swaps from the mark-to-market fluctuations of their funding and return-seeking assets.
"With the initial crop of LDI pooled funds, there were clients who assumed that falling interest rates, though bad for their liabilities, were necessarily good for the performance of their LDI fund - but due to the mark-to-market issues around the assets held to generate LIBOR that wasn't necessarily the case," said Walsh. "We want to avoid those kinds of surprises for clients."
Darracott added: "One key bit of feedback we received from clients is that they are much happier to see a drag relative to LIBOR in the matching portfolio in exchange for more certainty about what's going on with the underlying assets, while getting growth from outside that portfolio."
At the same time, once a client has chosen the appropriate combination of Maturity and Asset Buckets, LGIM is then able to produce a blended unit price for the overall package.
"That enables them to track their overall unit price relative to liabilities, and decide whether they need to make any adjustments to any part of the solution," Walsh said.
"That's been quite tricky for schemes in the past: they've been faced with lots of moving parts and a challenge to figure out how much better or worse off they are at the end of each quarter."
The flexibility of Matching Plus is clearly designed to enable as many existing and potential clients to begin working toward thinking of LGIM as their 'one-stop-shop' for LDI, even as they maintain existing consultant and asset manager relationships.
Target clients include the more than 2,300 sub-£100m clients that LGIM works with already.
These schemes often have limited involvement with their investment consultant - to keep costs down, it is often only about where they have a regulatory requirement, said Darracott - and if they use smaller consultants, they often have limited tools to build these kinds of solutions in any case.
LGIM is able to work with consultants to present a choice of four or five different combinations of Matching and Asset Buckets, or even take the actuarial cash flows of a scheme and present a suitable choice of solutions directly to the client.
Longer term, the ambition is to see L&G Group take pension scheme clients through the entire journey from scheme design, through equity risk management and LDI and ultimately to buyout or buy-in.
"We can build what is effectively a tailored flight path," as Darracott put it.
Walsh added: "As we saw from the KPMG survey last week, pooled LDI providers are withdrawing from the market, and that's largely a question of the scale required to do this well."
LGIM's existing LDI pooled funds remain open to top-ups from investors, with Matching Plus available to all new LDI clients and those wishing to switch from the old products.