UK-based defined benefit (DB) pension schemes using a liability driven investment (LDI) strategy are being urged to drive a harder bargain with asset managers, consultancy LCP has said.

LDI strategies aim at investing in assets whose value moves in line with a pension scheme’s liabilities, LCP said, adding that this reduces volatility in funding levels.

LDI strategies have been “a cornerstone of the most successful investment strategies for UK DB pension schemes in the last decade”, it added.

LCP has found over the past year that it has collectively saved its clients more than £5m (€5.9m) per annum through using the combined negotiating power of the schemes that LCP advises.

Gavin Orpin, partner in LCP’s investment team, said: “In a high inflationary environment and as more schemes are heading to maturity, LDI strategies are becoming even more important. The market is also becoming much more competitive on fees and we are seeing clients achieve really impressive fee savings.”

He said this could be achieved without needing to use fiduciary managers to act on behalf of a pension scheme.

LCP pointed to the high and rising inflation rates which will drive many pension schemes to review their inflation hedging strategies. This would provide an opportunity to review and renegotiate LDI fees as a whole, it added.

This is particularly true if fees have not come down in recent years. Schemes should also review their LDI manager periodically and can secure better value by switching where appropriate, the firm said.

One way for schemes to achieve value, according to LCP, is by using “bespoke” single funds rather than the pooled funds which have in the past been favoured by smaller schemes.

LCP said that single funds are simpler than using an array of pooled funds, are better placed to adapt in light of volatile inflation and can help prepare schemes for their end game.

The consultancy estimates that falling fee levels mean bespoke funds are now economical for most schemes that are hedging over £200m.

Rory Sturrock, senior consultant in LCP’s investment team, said: “Bespoke LDI funds used to be only for larger pension schemes. But the advantages of using bespoke funds are now available to smaller schemes as fee levels come down, and we expect this approach to become more prominent.”

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