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XPS launches LDI Oversight Service after research shows variation in manager performance during crisis

XPS launches LDI Oversight Service after research shows variation in manager performance during crisis

07 Feb 2023

  • Service launched after review finds big differences in impact of the gilts crisis on hedge and exposure levels between managers
  • LDI manager selection made a big difference to performance and scheme outcomes
  • Schemes must now question their managers on their approach and the changes they have made since

XPS Pensions Group has launched an LDI Oversight Service after finding significant differences in how LDI managers fared during the gilts crisis in Autumn 2022. The new service is available to all pension schemes and can be provided on a stand-alone basis, alongside advice from an incumbent investment consultant.

The service will draw on XPS’s comprehensive understanding of the market to make objective assessments of a scheme’s arrangements. This includes understanding how the manager performed during and after the crisis and what steps have been put in place since to protect against a repeat. The service will also see XPS work with clients to better understand the risk profile of their investments, including liquidity stress testing of LDI and non-LDI assets and by reviewing wider trustee governance and operational procedures, to ensure best practice in keeping with the Pension Regulator’s guidance published in November.

The LDI Oversight Service has been launched as XPS research published today (6 February) showed that, while all LDI pooled fund managers called for additional capital at short notice, the impact on their exposure was markedly different.

LDIWatch: The crisis and the importance of choosing the right manager looked at six prominent managers to understand how well they maintained hedges and liquidity during the crisis, how much hedging was reduced, and for how long this reduction was in place. It also considered pricing adjustments and suspensions of pricing and fund rebalancing events via capital calls and distributions. It found significant variation in how managers performed during the crisis, with implications for the funding position of their clients’ pension schemes.

The best-performing managers were those that were able to maintain both hedging levels, and liquidity/solvency of their pooled funds. Of the six managers examined, only one was able to avoid sacrificing one aspect to maintain the other. Schemes’ funding positions were likely to be negatively impacted if their manager implemented forced reductions in hedging or experienced liquidity issues. XPS estimates that a typical scheme’s overall funding position would have been eroded by 1.5% for every 10% of hedging reduction, with the average hedge reduction ranging between 4% and 16% across the LDI managers.

Ben Gold, Head of Investment at XPS said: “Our research has put paid to the myth that all LDI managers deliver broadly the same outcome and that the impact on schemes of the crisis would have been manager-agnostic – on the contrary, manager selection was important in determining the after-effects of the crisis.

The crisis also highlighted that other factors, such as poor client service, can have significant consequences. Not being able to speak to your fund manager client service team meant you might have been prevented from replacing your hedge in time. A holistic understanding of your LDI manager’s capability has been shown to be fundamental to schemes’ financial performance”

The research also sets out the key actions that trustees can take when considering the impact of the crisis and subsequent changes to their portfolio, particularly as LDI managers now evolve their propositions. These include reviewing their manager and their actions, undertake stress-testing, and reviewing operational procedures. XPS’ LDI Oversight service can do all of this and can be accessed by existing clients and as a standalone service for schemes with a non-XPS investment consultant.

For a full copy of the report, click here.

To find out more about our Independent LDI Oversight Service, click here.

For further information please contact Andre Kerr: [email protected].

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