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Pension schemes' interest in LDI strategies grows

25 June 2012

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A new study reports that the number of UK pension schemes that move away from investments in equities and more towards alternative and liability matching assets, is likely to increase "significantly" over the next three years.

The mid-market survey from Aon Hewitt looked at the asset and liability strategies being implemented or considered by defined benefit (DB) pension schemes worth between £10m and £500m. The firm writes that by number of schemes, this group represents over 60% of the UK pensions landscape.  

The results show that medium-sized funds are increasingly interested in liability driven investment (LDI) strategies in the current uncertain economic climate.

Key findings on scheme investment issues include:

* 59% of medium-sized UK pension schemes anticipate a further reduction in investment allocations to UK equities. 

* Almost 45% of the same sample also intends to reduce allocations to global equities.

* There is significant interest in increasing allocations to diversified growth funds or those with a more dynamic capability (39%).

* Greater interest was expressed in increasing allocations to corporate bonds (34%) compared with government bonds (28%).

* 42% of mid-market UK pension schemes intend to increase allocations to index-linked government bonds. 

* Two in five mid-market UK pension schemes intend to increase allocations to tailor-made LDI solutions via LDI funds.

John Belgrove, principal consultant at Aon Hewitt, said that a lot has changed over the past ten years when LDI was in its infancy and regarded as a niche strategy pursued only by larger UK pension schemes.

"It is now an established core strategy and has become a capability offered by many specialist fund managers," he said. "In a low yield environment, entry timing remains a challenge but while early adopters have fared well, our research suggests that small and medium-sized pension schemes are now benefiting from the lessons learned by the pioneers of LDI."

Belgrove said the change in strategic thinking amongst schemes was "impressive" given the economic troubles schemes have been facing and which may have resulted in many concluding that change was too costly or too difficult.

"Instead, it indicates that most medium-sized schemes remain focused on their longer term goals and are continuing to seek sensible opportunities to de-risk rather than be distracted by short-term market turbulence. There is still a long way to go, but one implication of this is that if yields did rise significantly then demand for new LDI solutions might explode."


First published 25.06.2012