Nearly half of DB liabilities hedged following surge in new LDI mandates

The consultant said there was a 17% increase in new LDI mandates in 2017 - with almost nine in 10 of these being pooled solutions largely taken up by small- to medium-sized schemes.

Of these, 66% are using ‘profile' funds which aim to represent a typical scheme's cashflows, while 34% were ‘bucket' funds where schemes replicate the timing of their cashflows by combining funds with different maturities.

An additional £61bn across 312 new mandates was hedged last year; these had an average size of £195m, compared to the £495m average size of existing mandates.

All-in-all, 49% of the UK's private sector DB liabilities have now been hedged, based on a £1.9trn liability figure on a gilts plus 0.5% basis and using data from the Pension Protection Fund's 2017 Purple Book.

While Legal & General Investment Management (LGIM) had secured the highest number of mandates and aggregate hedged liabilities by 2016, at 519 and £381bn respectively, its 2017 figures were not provided for the report, although these are expected to be marginally higher based on Legal and General's year-end results.

Insight Investment had the next highest amount of hedged liabilities in 2017, at around £250bn across nearly 300 mandates. However, BMO recorded the second highest number of mandates, at around 450 across circa £35bn; 140 of these were new in 2017, representing 45% of those secured across all providers that year.

While gilt yields ended the year roughly where they started, they fluctuated by between 10 and 15 basis points throughout 2017, creating a one to three percentage point movement on a typical scheme's liabilities.

This shows that waiting for a bargain in the market is pointless, especially as the best pricing occurs when the need to protect against downside risk falls away, the consultancy added.

XPS Pensions Group chief investment officer Simeon Willis 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.

"We are seeing quite a shift in where growth is being driven from. As new solutions are coming to the market to make LDI more accessible and affordable, we are seeing more small to medium pension schemes taking advantage."

Just over two in five new mandates were bought through platforms or fiduciary management. For example, 70 new mandates were secured through Mobius Life's platform, while 57 mandates came from fiduciary management.

Willis added: "While 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."

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• Topics
• Investment
• XPS Pensions Group
• Simeon Willis
• Liability Driven Investment
• Mobius Life
• BMO Asset Management
• Insight Investment
• LGIM
• data