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UK investors put faith in LDI
13 December 2013
New research shows more investors are using liability-driven investing strategies
More than two thirds of UK investors see importance in liability-driven investing (LDI) strategies, according to a new survey by SEI.
Some 75% of investors are using LDI or intend to use it in the future. There were 58 UK respondents comprised of financial directors, chairman of trustees, and trustees from UK defined benefit schemes with between £15m (€24.4m) and £5bn in AuM.
Out of this group, the proportion of investors using an LDI strategy has risen from 33% in 2012 to 47% in 2013.
David Hickey, director, European advice for SEI: “The complexity and increased speed of the financial markets has become hugely challenging for pension trustees who are often resource constrained, be that of their time or expertise.
“These findings demonstrate a growing awareness amongst U.K. pension professionals of a need to better manage funding level volatility. Employing a strategy that focuses on the liabilities and thus the funding level of the scheme, rather than just asset growth, can stabilise a scheme’s overall funding level and create greater certainty around contributions for a sponsor.”
The survey also found that UK trustees are becoming more sophisticated in approach to LDI. They are using more “tactical and creative tools” for managing liability risks such as synthetics gilts (19%), options (15%) and alternatives (19%).
Some 40% of respondents outsourced responsibility for the choice of instruments used to hedge liabilities, and 26 percent did so for the amount of hedging undertaken.
SEI’s global poll showed that more than half of all respondents (57%) said their organisation currently uses an LDI strategy in their pension portfolio. The 43% of investors that did not use LDI cited reasons such as plan underfunding, low-interest rates, and not wanting to give up investment returns.
When respondents were asked to rank the measures of a successful LDI strategy, the need to control funded status volatility was the top concern while the need to improve funding levels rose from fourth to second place.
SEI polled 130 corporate pension executives in the US, Canada and the UK.