Schemes increase liability hedges one year on from LDI market crisis

Schemes of all sizes increase hedging but activity greatest among smaller funds

Jonathan Stapleton
clock • 2 min read
Schemes increase liability hedges one year on from LDI market crisis

Pension schemes increased their liability hedges by 3% on average between 30 June 2022 and 30 June 2023, analysis by XPS Pensions Group finds.

The consultancy said it had analysed liability hedging changes at 178 of its pension fund clients between June 2022 and June 2023 in a sample representing some 81% of its client base by value.

It said the average XPS investment client, weighted by asset value, had increased its liability hedge by 3% during the year.

XPS said schemes of all sizes had increased their hedging on average but noted activity was greatest among smaller schemes - with those below £10m increasing hedging on average by 16% during the period and schemes between £10m-£50m increased hedging by 10%.

It said this reflected the greater scope smaller schemes had to increase their hedges given their lower initial hedging levels.

Despite this, XPS said some 22% of schemes had a lower level of hedging compared to a year ago - either as a consequence of lost exposure during the liability-driven investment (LDI) crisis or as a strategic decision in light of a need to appropriately manage liquidity and other operational factors going forwards.

By number, it said 35% of XPS's investment clients increased their hedging and for 43% it has remained unchanged.

XPS commented that the increase in hedging among a sizeable portion of schemes demonstrated     that, far from being put off LDI as a risk management approach, pension schemes had employed it to further protect the funding level improvements that have been witnessed over the past year, with aggregate UK defined benefit scheme funding levels estimated by the consultancy to have improved by 17% when measured on a low risk liability basis.


XPS also looked at the fees paid to pooled LDI managers - estimating these had fallen by 7% over the last year as a result of rising gilt yields depleting the size of LDI funds.

It said this fee fall comes despite increased hedging by pension schemes and LDI funds running greater cash buffers.

XPS said it had not seen LDI managers seeking to change their fee arrangements.

The consultancy said fiduciary managers had also been impacted by falling asset values with their revenues typically linked to the value of assets they manage.

XPS said it has observed an emerging trend of some fiduciary managers materially increasing their fee to offset the falls in asset values and revenues.

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