GLOBAL – Nearly half of Europe’s pension funds are using, or planning to use, liability-driven investment strategies, according to a survey from JP Morgan Asset Management.
The bank’s first LDI survey found 19% of respondents are currently using an LDI strategy – and that a further 29% intend to such a move.
If this happens “then LDI is set to become a major part of mainstream pension management in the very near future, with only 10% of the respondents thinking LDI is just a fashion”.
Changes to pensions regulation is the key driving factor behind funds adopting LDI, the firm said.
Four countries are leading the way, JP Morgan said. They are: the Netherlands, Denmark, Sweden and the UK.
Sixty-six percent of Dutch funds are either using or considering LDI. Denmark and Sweden follow at 53% and then the UK at 44%.
“This goes some way to explaining the lower response rate from pension schemes in Germany and Switzerland - perhaps reflecting that the concept of LDI is less recognised because funding requirements are not based on the market value of liabilities in these markets,” the company added.
The first move towards LDI was an increase in fixed income duration, JP Morgan said – pointing out that more than half of respondents have altered or are considering altering their fixed income duration.
“Based on the survey findings, the average current duration across Europe of 9.3 years is expected to increase to an average 11.1 years in the future.
“In the Netherlands and UK where the increase in future duration was highest - 10.5 years to 13.8 years and 15.1 years to 17.1 years respectively, the majority (70% and over) are doing so for liability driven reasons.”
“The findings in this survey show that while LDI is very much being discussed across Europe actual take-up and perception of what it should entail varies widely between countries,” JP Morgan AM’s European client solutions head said Karin Franceries.
“The UK is a fascinating example of this as, whilst there is a greater prevalence of pension scheme deficits, there seems to be a reticence to fully embrace LDI strategies, with 56% of respondents not currently considering LDI.
“We believe, however, that this will change as more UK schemes realize that LDI extends beyond cash flow matching and can also deliver excess returns, to help close pension deficits.
“This has already happened in markets such as Netherlands, Sweden and Denmark, where the interest in LDI has gathered pace with the increasing awareness that LDI is not simply a fixed income strategy but a risk management framework.”