liability driven investment · ldi report | 5 pooled solutions 2018 was another strong year for the...
TRANSCRIPT
Liability Driven Investment:A £1 trillion market
Annual Survey 2019
LDI Report | 1
History is littered with examples of conventional thinking proved wrong. In 1985, the New York Times reported on the demise of the laptop ‘fad’. The reasoning was that they were heavy, expensive and had poor battery life. The New York Times’ mistake was confusing the underlying concept which was sound, with the shortcomings of the early prototypes which needed significant work to appeal to the mass market.
Similarly, investors who initially dismissed LDI as being an elaborate solution to a theoretical problem weren’t seeing the bigger picture. LDI at its heart protects a pension scheme from a lower yield environment; exactly the environment we find ourselves in. Early approaches were only accessible to large schemes, were complex
and weren’t necessarily explained using the clearest language. However, the benefits were there for the taking, albeit with limited initial adoption.
But like the laptop, LDI is now commonplace. The initial challenges are well and truly behind us with a fantastic range of intelligent, high quality and simply packaged products to suit differing needs.
The pensions mass market has overcome its initial reservations and LDI is now a £1 trillion market. This is a great achievement for fund managers, advisors and trustees, who are now firmly taking control of their schemes’ futures, not leaving it to chance.
IntroductionLDI market smashes through £1 trillion
Simeon WillisChief Investment Officer
LDI – delivering in practice:LDI isn’t about making money; it is about reducing risk, or ‘hedging’.
The chart below illustrates the extent to which UK government bond yields have fluctuated over 2018. Liability values of a typical scheme* will have fluctuated by around 8% from the peak to the trough of these yield moves. LDI neutralises this impact, making funding levels more stable and pensions more predictable.
United Kingdom 20-Year Bond Yield over 2018
Source: Refinitiv* Assumes 20 year duration
Watch LDI Survey highlights
2.1%
2.0%
1.9%
1.8%
1.7%
1.6%
1.5%
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec
High of 2.1%
Low of 1.6%
2 | XPS Investment
The LDI market in 2018
Notional amount of liabilities hedged
Over £1 trillion liabilities hedged
2018 saw the total notional value of liabilities hedged go over the £1 trillion mark. This is a £59bn (6%) increase from £965bn in 2017 to £1,024bn in 2018. Given the minimal movement in yields again this year, broadly all of this gain can be attributed to new LDI mandates.
Total mandates
2,140 2,405 mandates
A 12% increase. Overall the number of mandates increased by 265, the biggest single contributor to this was directly accessed pooled funds (127), with a significant net contribution of 118 from platforms and fiduciaries (once double counting of underlying mandates has been adjusted for).
1 Estimated as at 31 December 2018 based on data from the PPF Purple Book (2018) and discount rates of gilts + 0.5% pa. We note 54% is likely to underestimate the actual level of hedging as it excludes hedging achieved through holding bond assets outside of a specific LDI hedging program.
2 LGIM declined to participate in this survey, data based on KPMG LDI survey 2017.
LDI proves popular on platforms
52% increase in the number of mandates accessed via the Mobius Life investment platform
The vast majority of new mandates are coming from smaller schemes. This is no doubt partly thanks to the growing success of investment platforms and fiduciary management.
The Big Three still dominate
87% of overall liabilities hedged estimated to be managed by LGIM2, Insight and BlackRock
Insight accounted for the vast majority of growth in overall liabilities hedged this year. Whilst BMO now have the largest number of mandates, they remain 4th largest by notional liabilities hedged.
Proportion of UK liabilities hedged
49% 54%of liabilities hedged with LDI
Estimating that the UK private sector had a total DB pension scheme liability of approximately £1.91trn1, on a low-dependency gilts+0.5% basis at the end of December 2018, over half of these liabilities are now hedged with LDI.
Gilts: the firm favourite
86%of notional liabilities hedged using gilt-based derivatives rather than swaps
A mere 14% of notional liabilities hedged using LDI are implemented through swap-based derivatives. Schemes choosing to use mainly gilts to hedge liabilities is reflective of the higher yields at longer maturities and that the majority of pension schemes are funded on a gilts based measure.
LDI Report | 3
Who’s doing what?
Fiduciary managers and platforms rallied this year with a 28% increase in the number of clients employing LDI through these approaches. As at 31 December 2018 there were 600 schemes accessing LDI via fiduciary management or via a platform, which accounted for 178 mandates
at underlying managers. We have adjusted the total mandates to account for this.
BMO added a further 93 new mandates over the year, and now have the largest number of mandates. Insight also made some significant
additions over the year, with an increase of £67bn notional liabilities hedged across 30 new mandates.
Total hedged liabilities up from £965bn to £1,024bn
Total LDI mandates up from 2,140 to 2,405
The market continues to grow at a pace.
* LGIM declined to participate in this and last year’s survey. Therefore all LGIM data is sourced from the KPMG LDI Survey 2017 and assumed to remain constant in 2017 and 2018.
Over half of UK private sector DB liabilities are now hedged using LDI. A fantastic achievement.
Mark Minnis Head of LDI2017
2018
2017
2018
Nat
iona
l am
oun
the
dg
ed (
£b
n)N
umbe
r of m
anda
tes
LGIM
*
Insig
ht
BlackR
ockBM
O
Schro
ders
Aviva
River &
Mer
cant
ile
Cardan
o
Aberdee
n St
andar
d
Goldm
an S
achs
State
Stre
et
AXA IM
PIMCO
BMO
LGIM
*
Insig
ht
BlackR
ock
Schro
ders
River &
Mer
cant
ile
Aberdee
n St
andar
d
Cardan
o
State
Stre
et
Goldm
an S
achs
AXA IM
PIMCO
Aviva
600
500
400
300
200
100
0
400
350
300
250
200
150
100
50
0
4 | XPS Investment
Segregated and bespoke pooled solutions
Segregated and bespoke pooled solutions account for 89% of the overall LDI market by value of liabilities.
Notional amount of liabilities hedged in segregated and bespoke pooled mandates
Number of segregated and bespoke pooled mandates
In 2018 the ‘big players’ in the segregated and bespoke market (LGIM*, Insight and BlackRock) held an estimated 89% of the market by notional amount hedged, with an average mandate size of £1.9bn. River & Mercantile also showed their popularity with smaller schemes in this space by holding the third highest number of mandates with a lower average mandate size of £145m.
As mentioned last year we expect to see the focus of growth continue to shift towards pooled mandates as more and more smaller schemes enter the market.
* LGIM declined to participate in this and last year’s survey. Therefore all LGIM data is sourced from the KPMG LDI Survey 2017 and assumed to remain constant in 2017 and 2018.
The segregated and bespoke pooled LDI market continues to be dominated by the Big Three for the big ticket mandates.
Rebecca Barton Associate
2017
2018
LGIM
*
Insig
ht
BlackR
ock
Schro
ders
Aviva
River &
Mer
cant
ileBM
O
Cardan
o
Aberdee
n St
andar
d
Goldm
an S
achs
AXA IM
State
Stre
et
PIMCO
2017
2018Num
ber o
f man
date
s
LGIM
*
Insig
ht
River &
Mer
cant
ile
BlackR
ockBM
O
Schro
ders
Cardan
o
Aberdee
n St
andar
d
Goldm
an S
achs
AXA IM
PIMCO
Aviva
State
Stre
et
No
tio
nal a
mo
unt
hed
ged
(£
bn)
400
350
300
250
200
150
100
50
0
250
200
150
100
50
0
LDI Report | 5
Pooled solutions
2018 was another strong year for the pooled LDI market. 92% of this year’s new mandates were from pooled solutions, which is an increase from 87% in 2017.
Notional amount of liabilities hedged in pooled mandates
Number of pooled mandates
* LGIM declined to participate in this and last year’s survey. Therefore all LGIM data is sourced from the KPMG LDI Survey 2017 and assumed to remain constant in 2017 and 2018.
73% of all LDI mandates are now in pooled LDI solutions highlighting the efforts made by managers and advisers to bring accessible LDI solutions to all schemes.
Tim Miller Consultant
2017
2018
2017
2018
Insig
ht
LGIM
*
BMO
BlackR
ock
Schro
ders
State
Stre
et
Aberdee
n St
andar
d
AXA IM
BMO
LGIM
*
Insig
ht
BlackR
ock
Schro
ders
Aberdee
n St
andar
d
State
Stre
et
AXA IM
600
500
400
300
200
100
£0
Num
ber o
f man
date
sN
oti
ona
l am
oun
the
dg
ed (
£b
n)
40
35
30
25
20
15
10
5
0
6 | XPS Investment
Accessing LDI
There were many different ways to access the LDI market in 2018, to suit all schemes.
Platforms (Mobius Life)
143 217 Growth in mandates accessed through the Mobius Life Platform over 2018
A platform provides a means for pension schemes to access a wide range of investment funds, whilst having the administrative simplicity of dealing with one manager. Our analysis focusses on Mobius Life again this year as they dominate the non-fiduciary DB platform market. We have seen a 52% increase in the number of mandates accessed via the Mobius Life investment platform over 2018.
There are a number of other platforms available, often associated with fiduciary management and DC investment. We cover fiduciary management separately below.
Fiduciary management
325 383 Growth in mandates accessed through fiduciary management over 2018
We saw an 18% increase in the number of mandates accessed through fiduciary management in 2018, which compares to 22% in 2017.
Segregated vs Bespoke pooled vs Pooled mandates
Proportion of mandates by number
70% 73%24%6% 6%
21%2017 2018
Pooled Bespoke PooledSegregated
Platforms and fiduciary managers help make it possible for schemes of almost any size to access LDI so it’s great to see these markets doing so well.
Rachel Titchen Consultant
Gilts vs Swaps
Gilts
Swaps
86%14%
Proportion of exposure gained through gilt and swap derivatives
Pension schemes can achieve LDI hedging using gilt-based derivatives (such as gilt total return swaps, gilt repo or gilt futures) or swap-based derivatives (such as interest rate swaps, inflation swaps and real rate swaps). Swaps are tailored to individual requirements and therefore can provide a closer fit to a scheme’s cashflows compared to gilt derivatives which are only available at specific maturities and require regular ‘rolling’ into new contracts. Despite this only 14% of notional liabilities hedged using LDI are implemented through swap-based derivatives. This is reflective of the higher yields available on gilts at longer maturities and that
the vast majority of pension schemes are funded on a gilts basis so are more closely matched.
LIBOR vs SONIASwap contracts have traditionally been based on LIBOR interest rates. However following the severe shortcomings of LIBOR which were identified and widely acknowledged following cases of high profile manipulation, LIBOR has been replaced by SONIA as the reference risk free rate. Further LIBOR will effectively cease to exist beyond 2021.
Given swap contracts last for many years they will outlive the availability of a reliable LIBOR figure which has
necessitated a program of switching from LIBOR swaps to SONIA swaps.
This is a market sensitive issue given that some fund managers are yet to trade from LIBOR to SONIA swaps and have a decreasing window of opportunity. Therefore some managers declined to provide this information.
From the range of managers that we received updates from there are examples of managers that have fully removed their LIBOR exposure as at December 2018, and a number that still had a majority of exposure to LIBOR swaps which will need to be transitioned.
Given the wide disparity of approaches being taken to transition away from LIBOR swaps before 2021, it is important to be aware of your manager’s approach and progress to date.
Nick HarveyPrincipal
LDI Report | 7
8 | XPS Investment
Our thanksWe would like to thank the following organisations for their involvement in this year’s survey:
Aberdeen Standard, Aon, Aviva, AXA IM, BlackRock, BMO, Cardano, Goldman Sachs, Insight, Mercer, Mobius Life, PIMCO, River & Mercantile, Russell Investments, Schroders, SEI, State Street and Willis Towers Watson.
How we define LDIThis survey relates to the UK institutional pensions market only. It does not include insurance market capital or non-UK pension investment. Mandates have been included where there is a defined liability cashflow benchmark or derivatives are used to hedge exposure for the purposes of reducing risk relating to nominal, inflation or real interest rate risk. Broad bond market benchmarked funds or single stock gilt funds have not been included.
AuthorsSimeon WillisChief Investment OfficerE: [email protected]: 020 3327 5000
Nick HarveyPrincipalE: [email protected]: 020 3327 5000
Tim MillerConsultantE: [email protected]: 020 3327 5000
Mark MinnisHead of LDIE: [email protected]: 0113 224 0200
Rachel TitchenConsultantE: [email protected]: 0121 230 1900
Rebecca BartonAssociateE: [email protected]: 0131 230 0347
LDI Report | 9
xpsgroup.com
About usXPS Pensions Group is the largest pure pensions consultancy in the UK, specialising in pensions actuarial, investment consulting and administration, with revenues of over £110 million. We are the only UK pensions specialist listed on the FTSE. With over 1,200 staff in 15 UK locations, our business combines expertise, insight and technology to address the needs of both pension trustees and sponsoring companies for over 1,000 pension schemes and undertakes pensions administration for over 800,000 scheme members.
XPS Investment provides clear and independent investment advice that can be quickly and effectively implemented. We advise pension schemes and their corporate sponsors and have over £35bn of assets under advice.
1903013_27 Date Published: 04/04/19
Important information: Please note the opinions expressed herein do not take into account the circumstances of individual pension funds and accordingly may not be suitable for your fund. The information expressed is provided in good faith and has been prepared using sources considered to be reasonable and appropriate. While information from third parties is believed to be reliable, no representations, guarantees or warranties are made as to the accuracy of information presented, and no responsibility or liability can be accepted for any error, omission or inaccuracy in respect of this. This document may also include our views and expectations, which cannot be taken as fact. The value of investments and the income from them can go down as well as up as a result of market and currency fluctuations and investors may not get back the amount invested. Past performance is not necessarily a guide to future returns. The views set out in this document are intentionally broad market views and are not intended to constitute investment advice as they do not take into account any client’s particular circumstances.
Please note that all material produced by XPS Investments is directed at, and intended solely for the consideration of, professional clients within the meaning of the Financial Services and Markets Act 2000 (FSMA). Retail or other clients must not place any reliance upon the contents. This document should not be distributed to any third parties and is not intended to, and must not, be relied upon by them. Unauthorised copying of this document is prohibited.
This document should not be distributed to any third parties and is not intended to, and must not be, relied upon by them. Unauthorised copying of this document is prohibited.
© XPS Pensions Group 2019. XPS Pensions Consulting Limited, Registered No. 2459442. XPS Investment Limited, Registered No. 6242672. XPS Pensions Limited, Registered No. 03842603. XPS Administration Limited, Registered No. 9428346.
All registered at: Phoenix House, 1 Station Hill, Reading RG1 1NB.
XPS Investment Limited is authorised and regulated by the Financial Conduct Authority for investment and general insurance business (FCA Register No. 528774).
Belfast T: 028 9032 8282
1st Floor – Flax House 83-91 Adelaide Street Belfast BT2 8FF
Edinburgh T: 0131 230 0300
3rd Floor – West Wing 40 Torphichen Street Edinburgh EH3 8JB
Manchester T: 0161 393 6860
82 King Street Manchester M2 4WQ
Reading T: 0118 918 5000
Phoenix House 1 Station Hill Reading RG1 1NB
Birmingham T: 0121 230 1900
1 Colmore Row Birmingham B3 2BJ
Guildford T: 01483 330 100
Tempus Court Onslow Street Guildford GU1 4SS
MiddlesbroughT: 01642 727331
Vancouver HouseGurney StreetMiddlesbroughTS1 1JL
Stirling T: 01786 237 042
Scotia House Castle Business Park Stirling FK9 4TZ
Bristol T: 0117 202 0400
33 – 35 Queen Square Bristol BS1 4LU
Leeds T: 0113 244 0200
10 South Parade Leeds LS1 5AL
Newcastle T: 0191 341 0660
4th Floor – Wellbar Central Gallowgate Newcastle NE1 4TD
Wokingham T: 0118 313 0700
Albion Fishponds Road Wokingham RG41 2QE
Chelmsford T: 01245 673 500
Priory Place New London Road Chelmsford CM2 0PP
London T: 020 3967 3895
11 Strand London WC2N 5HR
Perth T: 01738 503 400
Saltire House 3 Whitefriars Crescent Perth PH2 0PA
Please direct all email enquiries to: E: [email protected]
Contact us xpsgroup.com