Legal & General Investment Management (LGIM) has been at the vanguard of liability driven investment (LDI) for 15 years and its leading position shows no sign of abating.

In 2015, the annual KPMG survey showed that for the third consecutive year LGIM was the largest provider of LDI to UK pension schemes, with 44% of the market.

LDI is an investment approach that allows pension funds to invest in ways that prioritise long-term stability, based on the cash flows needed to fund future liabilities. LGIM’s LDI solution enables the retention of an allocation to growth, while reducing risk, via pooled and segregated investment solutions that are specifically designed to hedge interest rate and inflation risk.

LGIM’s offering emerged out of conversations with clients that were experiencing the decline or closure of defined benefit (DB) pension schemes.

“We recognised that from a company point of view, changes in interest rates and inflation could have a big impact on balance sheets,” says Mike Walsh, head of institutional distribution.

Working with large clients to manage their pension schemes through the financial crisis, LGIM invested significantly in helping them make better informed decisions as part of a holistic approach to managing risk. “We keep the focus on what the client needs to know, using the entire toolkit to enable pension schemes to be more sophisticated in how they manage risk,” says Walsh.

He notes that around 50% of FTSE 350 companies currently have pension schemes that are cash flow negative. “They need to ensure that they are managing the risk in their pension scheme, so we launched a range of LDI funds and buyout award products.”

In 2015, LGIM launched a self sufficiency portfolio utilising its extensive experience of using complementary LDI and credit strategies. The portfolio integrated the scheme’s matching assets within a single cash flow-driven mandate – managed to the scheme’s liability and liquidity requirements.

It has also enhanced its pooled LDI service offering, to adapt to the changing nature of both scheme liabilities and the effectiveness of different instruments in matching those liabilities. The latest part of LGIM’s pooled LDI toolkit is the Synthetic Leveraged Credit Fund. 

The fund can be used alone or as part of a wider LDI strategy, with the aim of gaining capital efficient exposure to changes in credit spreads.

A key differentiator for LGIM, according to Walsh, is that as part of the L&G group it is the only LDI manager that is able to provide for the full journey – from active scheme to fully securing benefits – rather than requiring a change of partner halfway through. 

With a £44bn annuity book, it can leverage its scale and breadth for the benefit of LDI clients.

"We are actually helping clients get to the end game, be that buyout or self sufficiency, by investing like an insurer. Who better to manage that than the largest insurer and buyout provider in the UK?”

Despite its dominant market share, LGIM has had to cope with challenging market conditions. In the aftermath of the financial crisis, shrinking of bank balance sheets typically left less balance sheet availability for LDI managers to trade with. But as Walsh points out, “L&G have not just mantained that, but actually expanded our access to bank balance sheets, because we also transfer risk with banks.”

Regulation has also had a major bearing on the LDI landscape, with major international measures such as the European Market Infrastructure Regulation (EMIR) and Solvency II forcing new thinking about how best to protect against interest rate and inflation risk.

“What’s really been impacting LDI strategies in the past couple of years is EMIR and central clearing,” says Walsh. “There’s a concerted industry move to central clearing and for it to be applied to pension schemes. We are proactively negotiating on behalf of our client base to make sure the terms of central clearinghouses reflect sensible terms from a pension scheme perspective.”

Rather than trying to stop the regulation, says Walsh, it is about making sure it’s more suitable for pension scheme requirements.