The liability driven investment (LDI) market rose by 11% in 2012 to cover £446bn of UK pensions scheme liabilities, a KPMG survey has revealed.

According to KPMG's latest research, 686 UK pension scheme mandates are now employing LDI.

Even though a number of fund managers have now entered the market, the provision of LDI is still dominated by the "big three" - Legal & General, Insight and BlackRock – which, combined, control around 90% of the market based on notional value.

Tom Brown, KPMG head of UK investment management, said: "Whilst the market continues to be dominated by the 'big three', growth has not been confined to them.

"Fund managers with both medium and large LDI businesses have added to their number of mandates over the year, although at the smallest end of the market the results were more mixed."

Brown added the fund management industry is "optimistic" about LDI's future.

KMPG's data also revealed that the big three also dominated the pooled funds market, but it noted that it was less marked as they accounted for a combined 61% of notional liabilities hedged.

The LDI survey also found that 35% of mandates have triggers in place and that the strongest growth has been in hedging inflation risks, given the macro environment and record low nominal yields.

According to the data, pension schemes are increasingly interested in using wider derivative strategies to capture return seeking exposures, such as equity and credit, to driver returns as well as hedge risks.

KPMG head of LDI research Barry Jones said: "Pension schemes continue to look for ways in which to reduce funding level risk.

"In an environment where cash is king, derivative based strategies appear to be a popular way of controlling key risks whilst freeing up assets that can earn a premium invested elsewhere. This is why we have seen growth in both LDI and synthetic return generating strategies over the last year."

From the survey, 80% of LDI managers believe their greatest source of new business will be from pension schemes new to LDI.

Jones said: "The continued development of propositions by smaller LDI players looking to challenge the market appears to be fully justified. The question remains whether these players can take significant market share from the big three in the segregated space which accounts for the vast majority of LDI assets in the UK."

First published 18.06.2013

monique_simpson@wilmington.co.uk