LDI market smashes through the £1 trillion barrier according to XPS Investment survey

XPS Investment’s second Liability Driven Investment (LDI) survey reveals the initial challenges around LDI strategies are well and truly behind us. LDI is now commonplace for UK pension schemes and used as a very effective way to reduce risk for all sizes of pension schemes.

Liability values of a typical pension scheme will have fluctuated by around 8% from peak to trough in relation to gilt yield movements over 2018. Using LDI strategies neutralises this impact, making funding levels more stable and pensions more predictable. XPS’s LDI survey 2019 confirms that the market continues to grow at a pace, as key findings include:

  • £1,024 billion of liabilities hedged in the UK pension market in 2018, an increase of 6% from 2017
  • 54% of UK pension scheme liabilities hedged in 2018
  • 92% of this year’s new mandates by number were pooled mandates, showing more small schemes entered the LDI market in 2018
  • 52% increase in the number of LDI mandates accessed via investment platforms and an overall increase of 12% on all LDI mandates in 2018
  • 86% of overall LDI liabilities were hedged using gilt-based derivatives, reflecting higher yields and that the majority of pension schemes are funded on a gilt-based measure
  • 87% of overall LDI liabilities hedged managed by The Big Three - LGIM, Insight and BlackRock

Simeon Willis, Chief Investment Officer at XPS Pensions Group said: “Those investors who initially dismissed LDI as being an elaborate solution to a theoretical problem weren’t seeing the bigger picture. We’ve known for some time that LDI, at its heart, protects a pension scheme from lower yield environments, which happens to be exactly the environment we find ourselves in today.

“LDI isn’t about making money, it’s about reducing risk and more schemes, of all sizes, are realising this and taking action. Following another strong year in 2018, we are expecting to see the focus of growth continue to shift towards pooled mandates, as more and more smaller schemes enter the LDI market”

Simeon continued: “With DB pension scheme liabilities estimated to total approximately £1.9 trillion and over £1 trillion of these hedged using LDI strategies, it shows that trustees, advisers and fund managers are now firmly taking control of their scheme’s future and not leaving it to chance. This is a great achievement for UK pension schemes.”