Navigating the UK LDI Market

INVESTMENT ADVISORY
Navigating the
UK LDI Market
2014 KPMG LDI Survey
kpmg.com/uk/investmentadvisory
2
| ExEcuTIVE SuMMARY
2013 saw continued exponential growth in the UK Liability Driven
Investment (LDI) industry with the number of mandates increasing
by 142 (21%) and total pension scheme liabilities hedged breaking
through the £0.5 trillion mark.
15 years ago, even the most informed trustee, advisor or asset manager might not have
known the meaning of the acronym LDI. Today, the total market exposure of the uK
Liability Driven Investment industry is over half a trillion pounds at the end of 2013,
making it arguably the largest single investment exposure that uK Defined Benefit (DB)
pension schemes have.
The spiralling growth in LDI has primarily been driven by the DB industry’s desire (both
from a trustee and sponsor perspective) to control and manage risk within pension
schemes. The techniques used within LDI permit significant risk mitigation without
the need to tie up large amounts of capital – thus freeing up assets for trustees
to seek opportunities elsewhere to cheapen the long term cost of funding the
pension scheme.
Over the past 10 years, asset managers have built up their LDI teams and
administrative infrastructure, sharpened their LDI offerings and created
platforms for pension schemes of all sizes to access. This perfect combination
of pension scheme demand and ever improving supply from hungry asset
managers competing for market share, has created one of the fastest
growing and innovative investment areas for pension schemes.
2014 KPMG LDI SuRVEY |
1
Executive
summary
“”
Simeon Willis, Head of Investment Strategy
LDI in wider strategy context
LDI has proven it is capable of sparking fierce debate at the heart of
strategic decision making.
Greater choice demands a more considered debate, where the
merits of individual risk exposures need to be assessed and
addressed individually. Whatever your view, be it that any hedging
at these levels would be madness or that the only madness would
be not hedging, this year’s LDI survey shows that these issues have
never been higher up on pension schemes’ risk agendas.
“”
Barry Jones, Head of LDI
My take on the LDI industry
Leading the LDI research at KPMG at this time is a real pleasure.
The very nature of LDI means that the industry is laden with
exceptionally gifted characters. I can genuinely say that the uK LDI
industry should be extremely proud of itself for how far it has come
and the standards of excellence that it operates at.
Executive summary
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
3
LDI trends
in pension
schemes
4
LDI trends
in fund
management
We would like to thank all managers for their participation in
the survey.
KPMG has again produced
the definitive snapshot of the
UK LDI Market
2
What is LDI?
Investment decisions can now be sliced in many different ways.
No longer is it just “How much growth exposure?”, “How much
matching?” It’s now possible to have both, in plentiful measures.
Put another way, given the wealth of LDI and structured products
available, it is possible for schemes to “have their bond and eat it too”.
This year’s survey builds upon our previous four annual surveys, creating
a comprehensive snapshot of the LDI market as it stands today.
We note that all data has been provided to KPMG by the asset
managers participating in the survey with the exception of the
bond market pricing information which is sourced from the Bank
of England.
3
2013 has seen the industry grow by another 20%. The established
players have continued to bulk out their already impressive teams
and invest further into systems and infrastructure. Likewise, there
continues to be a real push from the smaller players wanting to get
in on the action.
Whilst I fully expect the Big 3 to retain the lion’s share of business, it
will be intriguing to watch who is winning the most mandates going
forward – there are so many quality providers, each with their own
specialism and appeal.
5
Synthetic
generating
strategies
6
Outlook
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
4
2014 KPMG LDI SuRVEY |
| ExEcuTIVE SuMMARY
1
Executive
summary
Key headline trends
The LDI market smashes through
the £0.5 trillion barrier
Do the “Big 3” still dominate?
Yes, but…
> 2013 witnessed further rapid growth of the
LDI industry. The number of LDI mandates
increased by 142 to 825 and the total
liabilities hedged increased by £74bn to
£517bn.
> Legal and General, Insight and BlackRock,
the so called “Big 3”, remain firmly in place
as the dominant providers of LDI in the uK,
capturing 85% of the liabilities hedged. In
segregated and bespoke pooled mandates,
the “Big 3” make up 86% of the market and
in pooled LDI mandates accounts for 72%.
> With ongoing demand to de-risk, pension
schemes looking to bank the gains from the
continued equity market rally, and with 30%
of existing mandates having triggers in place
to extend further, we expect this growth to
continue into 2014 and beyond.
Mandate growth split evenly between
pooled and segregated
> LDI was once the domain of large pension
schemes with the scale to enter into
transactions directly with sell-side investment
banks in segregated mandates.
> Around half of the growth in number of
mandates in 2013 came from pension
schemes allocating into pooled LDI funds,
strongly confirming that LDI is accessible for
all pension schemes.
30%
> Legal and General remain the largest LDI
manager in the uK. They represent 44% of
the uK LDI market, hedging a total of £229bn
of uK pension scheme liabilities.
> However, in pooled LDI, competition for
business is fierce. When viewed from a
perspective of mandate numbers, F&c are
ranked number 2 and Schroders are only a
Growth in the use of swaption strategies
> 2013 has witnessed a significant growth
in the use of swaptions, with the notional
exposure increasing from £17.7bn to £27.9bn.
> It appears that this is a very specialised area
of the market (and primarily occupied by large
schemes) with only 25 pension schemes
currently utilising this approach. One manager
stated that their noteworthy growth was due
to significant client education efforts over the
previous two years – so, looking forward, this
space might see a steady upwards trend.
> Surprisingly, growth has been more muted
in the other Synthetic Return Generating
approaches over 2013 and in certain
approaches there has been a retraction.
fraction behind Insight and BlackRock.
Small schemes appear to be the
slowest to adopt LDI
> Only 21% of mandates, by number, relate
to schemes with total liabilities below
£50m. Whilst there appears to be plenty of
opportunity for small schemes to access well
structured and good value pooled vehicles, it
seems that the demand from small schemes
is much less than from larger schemes.
825
LDI mandates
of mandates use triggers
5
17%
Pension schemes have equal demand for
hedging inflation and interest rates in 2013
> Over 2013, the c.20% increase in liability
hedging has been shared equally between
inflation and interest rate protection. This
bucks the trend from last year, where inflation
2
What is LDI?
hedging was the most in demand.
The fund management industry remains
optimistic in its outlook
> The majority of managers expect interest
rates and real yields to rise in line with
or above what is currently priced into the
market in the next three years. However, we
do know that the market has the ability to
surprise even the most informed investors.
> Data from our 2010 survey shows that the
average asset manager at that time expected
that long dated yields would rise over the
next 3 years. A combination of central policy,
political intervention and market events have
led to these expectations not coming to
fruition. It is essential for pension schemes
who are tactically holding back from hedging
to ensure it is a risk that they can genuinely
3
LDI trends
in pension
schemes
4
LDI trends
in fund
management
afford to run.
growth in liabilities hedged
85%
5
Synthetic
generating
strategies
Market share of the ‘Big 3’
£500,000,000,000
of liabilities hedged
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
only 21%
6
Outlook
of mandates relate to schemes below £50m
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
6
| WHAT IS LDI?
LDI or ‘Liability Driven Investment’ has evolved a number of definitions. It captures
the ethos of investing with a view to meeting your future liabilities rather than simply
delivering a positive investment return. This can be achieved using approaches ranging
anywhere between simply increasing duration of a gilt portfolio, to the use of a more
sophisticated overlay strategy using instruments such as swaps.
LDI is a key risk management tool given the impact that movements in liabilities
have on scheme funding levels and deficits.
For the purposes of this survey KPMG has defined an LDI mandate as
one which either has some sort of liability cashflow benchmark, or uses
derivatives to gain exposure to nominal interest rate, real interest rate or
inflation hedging, primarily for the purpose of liability risk management.
Mandates simply with broad bond or gilt index benchmarks have been
excluded, as have single stock funds.
“”
Liability Driven Investment is a vital risk
management tool, but can be susceptible to
acronyms and jargon
2014 KPMG LDI SuRVEY |
7
1
Executive
summary
Key terms used in this report
LDI can be a technical topic, so for ease,
we briefly define some of the key terms
used in this report below.
2
What is LDI?
> Notional Value This is the value of
liabilities whose interest rate or inflation
risk has been hedged.
> PV01 A measure of the sensitivity of
a pension scheme’s asset or liability
value to changes in interest rates. It
is the change in present value of the
asset or liability for a 1 basis point (or
0.01%) change in yields. It is commonly
used in swap markets as a convenient
summary measure of trade size as
it captures both notional value and
duration in one figure.
> IE01 A measure of the sensitivity of
a pension scheme’s asset or liability
value to changes in expected inflation.
It is the change in present value of
the asset or liability for a 1 basis point
change in inflation, and is also known
as ‘Inflation PV01’.
> Swap A contract where two parties
agree to pay the other a series
of cashflows based on an agreed
economic variable or interest rate. It
is a way of trading different risks, for
instance interest rate or inflation risks.
3
LDI trends
in pension
schemes
4
LDI trends
in fund
management
5
Synthetic
generating
strategies
> Synthetic Derivative strategies that are
designed to replicate the performance
of an underlying asset without a
physical holding.
6
Outlook
What is LDI?
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
8
| WHAT IS LDI?
2014 KPMG LDI SuRVEY |
9
1
Executive
summary
KPMG and LDI
KPMG is a leading specialist advising pension
schemes and sponsors in relation to asset
and liability risk management.
We have been at the forefront of helping
clients understand the benefits that an LDI
approach can bring, and helping our clients
to understand and implement the approach
that is most suitable for them.
KPMG has a wealth of tools and experience
advising clients in relation to all stages of
LDI from:
> Feasibility
> Cost/benefit analysis
> Hedge construction
and implementation
> Monitoring
As with all risk management, real time
monitoring of progress is essential. To this
end, KPMG have developed an interactive
online tool, Fusion, which allows trustees and
companies to observe up to date movements
in their scheme’s financial position. This
includes observing the impact of movements
in interest rates and inflation, as well as the
success of hedging strategies and exploring
new possible strategies.
Visit KPMG Fusion
www.kpmgfusion.co.uk
for more information
KPMG is also deeply experienced in
integrating these and other investment
solutions with wider risk management
tools including funding strategy, benefit
changes, insurance products (such as buy
in) and longevity hedging to determine
the most appropriate arrangement. Our
annual LDI Survey is just one example of
KPMG’s commitment to investing in high
quality research to inform and underpin our
specialist advice.
2
What is LDI?
3
LDI trends
in pension
schemes
4
LDI trends
in fund
management
5
Synthetic
generating
strategies
“”
KPMG is highly experienced in advising on all aspects of
LDI. In addition, KPMG has proven capability to integrate
these decisions with wider pensions risk management
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
6
Outlook
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
| LDI TRENDS IN PENSION ScHEMES
> The number of LDI mandates
in the industry has increased
by 21% during the year from
683 to 825.
> Both nominal and real yields
have risen by around 0.5%
since their lows in April 2013,
reducing the cost of LDI
implementation and providing
some relief for the average
pension scheme.
> As can be seen from the first
two charts on the right, despite
only accounting for 45% of
the number of total mandates,
segregated mandates account
for over 80% of the total
notional value of liabilities
hedged. This is because a
segregated mandate is the
typical approach that larger
pension schemes tend to
utilise.
> However, the proportion of
total notional liabilities hedged
attributable to segregated
mandates actually fell by c.5%
from a base of 85% in 2012,
despite an increase in liabilities
hedged of £38.3bn. This was
due to rises in pooled and
bespoke pooled mandates.
£600bn
Notional liabilities hedged
LDI strategies has continued to increase from £443bn
to £517bn – an increase of 17%.
LDI trends in
pension schemes
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
Notional amount of liabilities hedged for uK pension
schemes spllit by type of mandate
£500bn
2
What is LDI?
£400bn
£300bn
£200bn
£100bn
Segregated
Bespoke
Pooled
£0bn
2011
2012
2013
3
LDI trends
in pension
schemes
hemes
sc
Total number of mandates under management
900
800
700
600
500
400
300
Segregated
Bespoke
Pooled
200
100
0
2008
2009
2010
2011
2012
4
LDI trends
in fund
management
2013
Note: Bespoke pooled data captured within pooled and segregated prior to 2011
> The amount of interest rate risk
hedging, measured in PV01,
has increased from £683m in
2012 to £822m in 2013, which
represents a 20% growth in
this measure.
> Inflation hedging, measured
in IE01, has also increased,
moving from £490m to £583m
over the year, which represents
a 19% growth in this measure.
11
1
Executive
summary
This increase has been driven primarily by
an increase in the number of mandates.
Total mandates
“”
Over 2013 the total notional value of liabilities hedged by
2014 KPMG LDI SuRVEY |
Total LDI hedging by uK pension schemes – as measured by PV01 and IE01
5
Synthetic
generating
strategies
1600
1400
1200
1000
£m
10
800
600
400
PV01
IE01
200
0
2008
2009
2010
2011
2012
6
Outlook
2013
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
| LDI TRENDS IN PENSION ScHEMES
2014 KPMG LDI SuRVEY |
13
1
Executive
summary
In contrast to previous years, we have
seen that the proportion of mandates with
market level triggers in place has fallen in
2013 when compared to the previous year.
From a base of 19% at the end of 2010,
29% at the end of 2011, and 34% in 2012,
the proportion of mandates where the
fund manager monitors and implements
triggers now stands at 30%.
Which benchmark?
A key decision for pension schemes using LDI
is which benchmark to use. Of the mandates
surveyed, as at the end of 2013, around 54%
were using a gilts based benchmark with
35% using swaps. The remaining 11% used a
combination, sometimes referred to as ‘best of
both’ approach. As would be expected, we have
witnessed little change in these proportions
since last year.
With yields rising through the year, trigger
strategies are likely to have been more
successful than in 2012; when yields
remained broadly flat.
2
What is LDI?
Please note the proportion with triggers
surveyed is likely to underestimate the true
level as some managers have indicated
use of triggers in general but without
specific client numbers. In these instances
we have assumed no triggers are in use.
Market level triggers remain the most
popular type of trigger strategy (compared
to funding level or time based triggers).
3
LDI trends
in pension
schemes
hemes
sc
Proportion of clients with triggers in place
40%
Proportion of clients with triggers in place
12
35%
30%
25%
4
LDI trends
in fund
management
20%
15%
10%
Discretionary or Execution-only?
5%
0%
2010
2011
2012
2013
Mandates with triggers split by type of trigger
Time based 3%
Combination 13%
Funding level 16%
Yield based 68%
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
The overall split between discretionary and
execution-only/semi-passive mandates has not
changed significantly since last year. Please
note that not all of the managers were able
to provide the data on management bases for
their mandates. Our results do however confirm
intuitive assumptions: segregated mandates
are managed on a discretion basis and the vast
majority of pooled mandates are managed on
an execution-only basis. Noticeably though, the
growing sophistication of the product offering in
pooled space means that discretionary mandates
are in place to challenge and even substitute
execution-only mandates.
Discretion
Semi-passive
Execution-only
Segregated and bespoke
160
74
49
5
Synthetic
generating
strategies
6
Outlook
Pooled
84
18
112
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
| LDI TRENDS IN FuND MANAGEMENT
2014 KPMG LDI SuRVEY |
15
1
Executive
summary
Background
> Most of the survey is based on the responses of 14 LDI providers who have
agreed to participate. Aberdeen Asset Management and Scottish Widows
Investment Partnership have decided not to participate this year due to an ongoing
merger. Following a merger between PSolve and River Mercantile, PSolve’s
responses are now presented under the name of River and Mercantile.
> As we have seen previously in our past surveys, there continues to be a large
concentration within the industry amongst the largest providers. However, we
have seen that competition and innovation has meant that this concentration has
reduced slightly.
2
What is LDI?
Number of mandates split by pension
scheme size
> This year we have added a new question to the
survey to capture the split of mandates grouped by
size of pension scheme. Not all of the managers
were able to provide the data, therefore our
conclusions are based solely on the responses we
have received.
> We are surprised to see the limited number of LDI
mandates for pension schemes smaller than £50m
in size; where there are only 86 mandates currently
in place.
3
LDI trends
in pension
schemes
> The results confirmed our intuitive understanding
that segregated solutions would be the solution of
choice for the larger pension schemes.
> Pooled mandates have proven to be a solution
for small sized schemes. Here over 60% of the
mandates are managed in pooled funds.
> Medium size schemes appear open to either pooled
or segregated approaches.
4
LDI trends
in fund
management
Number of mandates managed on behalf
of pension schemes
180
Segregated and bespoke
Pooled
160
140
Number of mandates
14
120
5
Synthetic
generating
strategies
100
80
60
40
20
LDI trends in
fund management
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
0
scheme size < £50m
scheme size £50m £500m
scheme size £500m - £5bn
scheme size > £5bn
6
Outlook
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
| LDI TRENDS IN FuND MANAGEMENT
Notional amount hedged in segregated and bespoke mandates
Key headlines
> The smallest segregated
mandate was £2.1m and the
largest was c.£25bn, which
demonstrates the wide range
of mandates segregated
LDI managers are able to
accommodate, despite the
pooled approach being the
favourite for small sized
schemes.
£225bn
2012
2013
£200bn
£175bn
£150bn
£125bn
£100bn
2
What is LDI?
£75bn
£50bn
£25bn
Ax
a
is
Ig
n
PI
M
CO
ldm
an
Sa
ch
s
Ri
ve
r
Go
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rd
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o
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hr
od
er
s
St
ate
St
re
et
F&
C
St
an
da
rd
Lif
an
e
dM
er
ca
nt
ile
ac
kR
Bl
Av
iva
t
oc
k
£0bn
igh
> The number of segregated and
bespoke mandates rose by 20%
over 2013 from 379 to 453.
> Total IE01 for segregated and
bespoke mandates in 2013 was
£552m which rose 20% from
£459m in 2012.
Number of segregated / bespoke mandates
140
F&C, £8.0bn
60
40
4
LDI trends
in fund
management
20
Schroders, £7.3bn
State Street, £7.2bn
a
nis
Ax
Sa
an
Ig
s
ch
CO
M
PI
ldm
t
no
rd
a
Ca
St
re
e
er
s
ate
Go
St
Sc
hr
od
C
F&
ile
er
ca
an
dM
ve
r
St
Goldman Sachs, £2.4bn
nt
ife
rd
L
an
Bl
da
ac
Av
iva
kR
oc
ht
IM
LG
PIMCO, £3.2bn
k
0
Cardano, £6.0bn
Other, £68.2bn
80
sig
River and Mercantile, £8.4bn
Ri
Ignis, £1.4bn
Axa, £0.9bn
PV01 and IE01 across segregated / bespoke mandates
£350bn
PV01
IE01
£300bn
LGIM, £220.6bn
3
LDI trends
in pension
schemes
100
In
Standard Life, £11.2bn
Number of mandates
Aviva, £12.0bn
Insight, £124.7bn
2012
2013
120
Notional amount hedged in segregated and bespoke mandates
BlackRock, £77.0bn
17
1
Executive
summary
£250bn
LG
IM
> The segregated mandate market
share remains concentrated,
with the three largest providers
accounting for 86% of the
market.
> Total PV01 for segregated and
bespoke mandates in 2013 was
£775m; rising by 23% from
£632m in 2012.
Notional amount hedged
> The market share of the
segregated and bespoke pooled
fund market is illustrated below.
In
s
Segregated LDI
2014 KPMG LDI SuRVEY |
PV01 / IE01 exposures
5
Synthetic
generating
strategies
£250bn
£200bn
£150bn
£100bn
£50bn
6
Outlook
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
a
Ax
nis
an
Ig
*
Sa
c
hs
*
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ldm
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rd
a
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s
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ate
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re
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hr
od
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ile
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Sc
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er
ca
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L
Av
iva
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ve
r
Ri
* Data not provided
St
an
ck
Bl
ac
kR
o
ht
sig
LG
IM
£0bn
In
16
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
18
| LDI TRENDS IN FuND MANAGEMENT
2014 KPMG LDI SuRVEY |
19
1
Executive
summary
Bespoke Pooled
We have defined Bespoke Pooled arrangements
as client-specific segregated mandates that are
contained within a pooled fund structure. These
can provide ease of access for schemes without
lengthy legal setup and counterparty negotiation.
We have captured bespoke pooled mandates
within the segregated data given the schemespecific nature of the mandates and comparable
skill sets required by fund managers. For
completeness, we have carved out the managers
that offer these structures and the number and
size of the client mandates. The bespoke market
remains relatively small relative to segregated.
The smallest bespoke pooled mandate was
£52m and the largest was £6bn.
We note that the numbers in Bespoke Pooled
LDI are distorted slightly due to the restructure
of the LGIM “Better Bonds” fund range, which
were previously categorised in Pooled LDI. Post
restructure in September 2013 these mandates
are now classified in the Bespoke Pooled section.
2
What is LDI?
3
LDI trends
in pension
schemes
Bespoke pooled mandate providers
Manager
LGIM
Insight
BlackRock
F&c
State Street
Axa
PIMcO
Total
Mandates
34
17
18
6
1
2
1
79
Notional liabilities hedged
£36.6bn
£20.0bn
£14.8bn
£3.3bn
£1.3bn
£0.4bn
£0.1bn
£76.5bn
4
LDI trends
in fund
management
5
Synthetic
generating
strategies
6
Outlook
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
2014 KPMG LDI SuRVEY |
| LDI TRENDS IN FuND MANAGEMENT
Key headlines
£10bn
> We note that the numbers
in Pooled LDI are distorted
slightly due to the restructure
of the LGIM “Better Bonds”
fund range. Post restructure
in September 2013 these
mandates are now classified in
the Bespoke Pooled section.
> This is further illustrated by the
number of mandates, where
F&c are now the second
most used provider in pooled
space and Schroders are only
fractionally behind BlackRock
and Insight.
£8bn
2012
2013
£6bn
2
What is LDI?
£4bn
£2bn
Ax
a
is
St
St
an
ate
da
Ig
n
rd
Lif
e
re
et
St
er
s
Sc
hr
od
F&
C
t
igh
In
s
ac
kR
oc
k
£0bn
Bl
Number of pooled mandates
3
LDI trends
in pension
schemes
140
Number of mandates
120
– Total PV01 for pooled mandates
in 2013 was £46.8m down by
8% from £50.7m in 2012.
100
2012
2013
80
60
40
– Total IE01 for pooled mandates
increased 1% to £31.7m in 2013
from £31.5m in 2012.
4
LDI trends
in fund
management
20
a
Ax
nis
rd
L
da
Ig
ife
t
re
e
St
an
ate
St
St
Bl
Sc
hr
od
er
s
C
F&
ht
sig
In
k
ac
LG
IM
0
oc
> The pooled mandate market
share by notional liabilities
hedged remains concentrated,
but to a lesser degree compared
with segregated. The three
largest providers now account
for 72% of the market using
this measure, compared with
79% last year. This suggests
that pooled is an area where
the competition has been more
successful at winning market
share.
£12bn
kR
> The number of pooled mandates
rose by 22% over 2013 from 304
to 372.
> The smallest pooled mandate
was £1m and the largest
was £663m. This highlights
considerable overlap with
use of segregated accounts,
demonstrating the sophistication
of the pooled funds to
accommodate larger mandates
even where segregated is a
viable alternative.
LG
IM
> The market share of the pooled
fund market is illustrated below.
21
1
Executive
summary
Notional amount hedged in pooled mandates
Notional amount hedged
Pooled LDI
Notional amount hedged in pooled mandates
Standard Life £0.6bn
State Street £1.3bn
PV01 and IE01 for pooled mandates
Ignis £0.1bn
Schroders £2.1bn
5
Synthetic
generating
strategies
£14m
LGIM, £8.0bn
£12m
F&C £3.2bn
PV01 / IE01 exposure
£10m
PV01
EI01
£8m
£6m
£4m
Insight £5.4bn
BlackRock £5.8bn
6
Outlook
£2m
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
a
Ax
nis
Ig
St
a
nd
ar
dL
ife
et
St
re
St
ate
er
s
Sc
h
ro
d
C
F&
sig
ht
In
k
oc
Bl
ac
LG
IM
£0m
kR
20
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
2014 KPMG LDI SuRVEY |
| LDI TRENDS IN FuND MANAGEMENT
23
1
Executive
summary
Range of pooled funds
> Building on our analysis on the range of pooled funds in the
LDI market, we have again shown the growth of how many
managers offer certain types of pooled LDI products. The below
analysis investigates the total number of different pooled fund
ranges (in each category) offered by the LDI industry to uK
pension schemes that are still running.
> 2013 has seen continued sophistication in this space and, as
such, there is clear growth in the number of discretionary
pooled funds opening.
2
What is LDI?
> Please note that the chart below only includes funds that are
currently running. This means that funds which were launched,
for example in 2007, and have since closed are not included.
Types and number of pooled funds (that are still running)
SWAP
Number
22
GILT
Nominal
Real
Inflation
DISCRETIONARY
25
3
LDI trends
in pension
schemes
20
15
4
LDI trends
in fund
management
10
5
0
12
20
13
20
14
20
12
20
13
20
14
20
12
20
13
20
14
20
5
Synthetic
generating
strategies
“”
Pooled fund options continue to expand, especially
in discretionary mandates; mirroring techniques
pioneered within segregated mandates.
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
6
Outlook
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
| SYNTHETIc GENERATING STRATEGIES
2014 KPMG LDI SuRVEY |
Pension schemes are increasingly
turning toward derivatives in order
to gain access to growth exposures,
such as equities and credit. These are
known as synthetic approaches.
We have again surveyed managers on
their use of return seeking derivatives
to gauge the trends in this area.
Over 2013, we have seen an increase in the use of synthetic approaches by
uK pension schemes, continuing the trend we described last year.
25
1
Executive
summary
> Swaption exposure showed the biggest increase, rising by 58% over 2013
despite a slight fall in the number of pension schemes utilising them. It
appears that the swaption market is the domain of large schemes with the
average exposure per mandate being significant.
> Whilst both the number of clients having synthetic equity exposure and
notional exposure rose in 2013, the trends of using different derivatives
varied compared to last year.
2
What is LDI?
> The number of schemes using equity futures has increased significantly over
2013. However, in terms of notional value, the growth was much slower,
indicating a larger number of mandates with smaller exposure.
> In terms of notional exposures, the use of equity Total Return Swaps
(TRS) and synthetic credit increased.
3
LDI trends
in pension
schemes
Number of clients using derivatives
2012
2013
70
Number of mandates
60
50
40
30
4
LDI trends
in fund
management
20
10
0
y
uit
Eq
nd
s
S a res
ion
R
u
pt
T
t
O
u
y
ity
uit y F
qu
Eq quit
E
f
eo E
ur
nly
ly
n
So
TR
y
uit
o
es
ur
t
Fu
Eq
it
ns
red
tio
ap
Sw
he
nt
Sy
C
tic
ixt
M
Notional exposure by instrument
2012
2013
£30bn
Synthetic
Return
Generating
Strategies
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
5
Synthetic
generating
strategies
£25bn
Notional Exposure
24
£20bn
£15bn
£10bn
6
Outlook
£5bn
£0bn
nly
ity
u
Eq
o
RS
T
Eq
y
uit
Fu
t
es
ur
ly
s
ion
on
y
uit
Eq
t
Op
it
ns
tio
ap
Sw
eti
th
n
Sy
red
cC
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
26
| OuTLOOK
2014 KPMG LDI SuRVEY |
Sources of growth in the LDI industry
We have gauged the LDI fund managers’ expectations around the source of new
LDI business. We asked the managers:
27
1
Executive
summary
“What is the most likely source of growth in 2014 for your LDI business?”
> The majority of managers still expect growth to come from new business rather
than existing LDI clients either extending their mandates or reaching triggers.
> In fact, no managers thought the main source of growth would be from market
level triggers being reached.
> This is consistent with last year’s results with even more managers expecting
the growth to come from new business.
2
What is LDI?
Most likely source of LDI ‘risk under management’ growth in 2014 for
your business?
Extensions to current LDI mandates advised by client 7%
£2.5bn
3
LDI trends
in pension
schemes
New business (from current non-LDI clients and/or new clients) 93%
Where do you think most new mandates will come from for your LDI
business?”
4
LDI trends
in fund
management
> 47% of managers expected new LDI clients to come from untapped LDI
business, with 40% expecting to convert existing non-LDI clients.
> Only 13% of managers expect that most of their new business will come from
competitors. This suggests there is a continuing trend of limited expectations of
changes in the market share.
Where do you think that most new mandates will come from for
your business?
New clients to your firm from
other LDI managers 13%
5
Synthetic
generating
strategies
Converting existing non-LDI clients into
LDI 40%
6
Outlook
Outlook
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
New clients to your firm but first time LDI clients (not from a competitor) 47%
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
28
| OuTLOOK
2014 KPMG LDI SuRVEY |
29
1
Executive
summary
What is the most important issue for the LDI industry in 2014?”
> The majority expect legislative changes to be the most important. This is likely to
include centralised clearing which relates to changes in regulations around how
derivatives are traded and stricter rules governing the levels and types of security
that are required. This is likely to have a significant impact on the operational side
of running an LDI business, due to the reliance on derivatives. This has grown from
56% of managers choosing this answer last year to 73% this year.
> No managers believe that counterparty default will be the most important issue for
the LDI industry in 2014.
2
What is LDI?
> centralised clearing may also highlight any weaknesses in fund managers’
established counterparty arrangements.
What is the most important issue for
the LDI industry in 2014?
None of the above 7%
3
LDI trends
in pension
schemes
Rising yields 13%
Counterparty default 0%
Collateral management
(e.g., SONIA discounting)
7%
Legislative changes
(e.g., centralised
clearing) 73%
“How prepared are you for central clearing?”
4
LDI trends
in fund
management
5
Synthetic
generating
strategies
> Over 70% said they were ready to switch immediately if required,
with the remainder expecting to be ready in time for the anticipated
regulatory change. This number has increased from 50% of
respondents being prepared for the switch to centralised clearing
last year.
“”
Legislative changes continue to dominate thinking
within uK LDI
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
6
Outlook
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
30
2014 KPMG LDI SuRVEY |
| OuTLOOK
31
1
Executive
summary
Bond market views
Nominal and Real 20 year gilt yields
We asked the investment managers:
5.0
“ Where do you expect the 20 year
index-linked gilt real yield to be in
three years time relative to what
the market is implying?”
The vast majority of managers believe
that the 20 year real yield will be in
line or higher than what the market is
currently implying.
3.0
2.0
40
35
30
25
20
15
10
3
LDI trends
in pension
schemes
5
0
0.0
%
0.5
<-
.5%
to
%
-0
In
e
1
r1
Ap
g
Au
11
1
1
c1
t1
Oc
De
b
Fe
12
2
r1
Ap
g
Au
12
2
2
c1
t1
Oc
De
b
Fe
13
3
r1
Ap
g
Au
13
3
t1
Oc
3
c1
De
b
Fe
14
%
lin
%
+0
-0
-1.0
2
What is LDI?
45
1.0
This year’s results show that there
is more consensus among fund
managers regarding gilt yields and
inflation, with the majority believing
that market expectations are either
correct or slightly below where yields
will end up.
to
0.5
.5%
>0
4
r1
Ap
Source: Bank of England
Relative to what is implied by the market, where do you think the
20 year fixed gilt nominal yield will be in three years time?
We asked the investment managers:
“ Where do you expect the 20 year
fixed gilt nominal yield to be in
three years time relative to what
the market is implying?”
Relative to what is implied by the market, where
do you think 20 year gilt implied inflation will be
in three years time?
We asked the investment managers:
“ Where do you expect the 20 year
gilt implied inflation to be in three
years time relative to what the
market is implying?”
45
40
35
30
Frequency
Implied Inflation
The vast majority of respondents
believe that inflation will be in line
or slightly above what is currently
implied by the market.
25
20
15
4
LDI trends
in fund
management
45
40
35
30
Frequency
Nominal gilt yields
The vast majority of managers believe
that nominal fixed gilt yields will be in
line or higher than what the market is
currently implying.
Real 20 year gilts
Nominal 20 year gilts
4.0
Yield, %
We asked all investment managers
what they thought about gilt yields
and inflation. We summarise the
results, which include the responses
from a total of 20 fund management
houses. The chart on the right
illustrates historical 20 year fixed
interest gilt and index-linked
gilt yields.
Relative to what is implied by the market, where
do you think the 20 year index-linked gilt real
yield will be in three years time?
Frequency
Due to the magnitude of the impact
on funding levels, having a clear policy
on how tactical views influence long
term strategy is critical.
Real gilt yields
5
Synthetic
generating
strategies
25
20
15
10
10
5
5
0
0
.5%
0
<-
.5%
-0
to
-
0%
In
e
lin
%
+0
t
o0
.5%
.5%
>0
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
.5%
0
<-
.5%
-0
to
%
-0
In
e
%
lin
%
+0
to
0.5
.5%
>0
6
Outlook
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
KPMG contacts in respect of this survey
Simeon Willis, CFA
T: +44 (0)20 7694 4408
E: [email protected]
Barry Jones, FIA
T: +44 (0)161 838 8395
E: [email protected]
Your regional KPMG Investment Advisory contacts
London
Birmingham
Manchester
Patrick McCoy
T: +44 (0) 207 311 2393
E: [email protected]
Ben Gold
T: +44 (0) 121 609 6098
E: [email protected]
Barry Jones
T: +44 (0) 161 838 8395
E: [email protected]
Reading
Leeds
Glasgow
Greg Wright
T: +44 (0) 118 964 2276
E: [email protected]
Nick Evans
T: +44 (0) 113 231 3341
E: [email protected]
David O’Hara
T: +44 (0) 141 300 5533
E: [email protected]
Editor: Simeon Willis
Authors: Barry Jones and Simon Baker-Munton
Data-Analyst: Khristina Kushniruk
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The 2014 KPMG LDI survey has been conducted using information provided by third parties. KPMG does not accept responsibility for the accuracy of the data or information provided herein.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely
information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without
appropriate professional advice after a thorough examination of the particular situation.
© 2014 KPMG LLP, a uK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International cooperative, a Swiss entity. All rights reserved.
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