Research reveals 'significant differences' in LDI managers performance following volatility

XPS Pensions has launched a new liability-driven investment (LDI) oversight service, after research revealed “significant differences” in how LDI managers fared during the gilts crisis in Autumn 2022.

The service was launched after the group’s LDI Watch showed significant variation in how managers performed during the crisis, with implications for the funding position of their clients’ pension schemes, also revealing that, while all LDI pooled fund managers called for additional capital at short notice, the impact on their exposure was markedly different.

According to the research, the best-performing managers were those that were able to maintain both hedging levels, and liquidity/solvency of their pooled funds, although of the six managers examined, only one was able to avoid sacrificing one aspect to maintain the other.

Schemes’ funding positions were also likely to be negatively impacted if their manager implemented forced reductions in hedging or experienced liquidity issues.

In particular, XPS estimated that a typical scheme’s overall funding position would have been eroded by 1.5 per cent for every 10 per cent of hedging reduction, with the average hedge reduction ranging between 4 per cent and 16 per cent across the LDI managers.

The new oversight service will be available to all pension schemes and can be provided on a stand-alone basis, alongside advice from an incumbent investment consultant, and will aim to make objective assessments of a scheme’s arrangements.

This includes understanding how the manager performed during and after the crisis and what steps have been put in place since to protect against a repeat.

XPS will also look to work with clients to better understand the risk profile of their investments, including liquidity stress testing of LDI and non-LDI assets and by reviewing wider trustee governance and operational procedures.

XPS Pensions head of investment, Ben Gold, stated: “Our research has put paid to the myth that all LDI managers deliver broadly the same outcome and that the impact on schemes of the crisis would have been manager-agnostic – on the contrary, manager selection was important in determining the after-effects of the crisis.

“The crisis also highlighted that other factors, such as poor client service, can have significant consequences.

"Not being able to speak to your fund manager client service team meant you might have been prevented from replacing your hedge in time. A holistic understanding of your LDI manager’s capability has been shown to be fundamental to schemes’ financial performance”.

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