Pension schemes hedged over £1trn of liabilities in 2018, a 6 per cent increase on the previous year, an XPS Investment survey has revealed.

Liability Driven Investment (LDI) has become a mainstay in the pensions industry, with 54 per cent of UK pension schemes hedging liabilities in 2018, 87 per cent of which managed by the ‘big three’, BlackRock, Legal and General Investment Management and Insight Investment.

According to XPS, the strategy is now “commonplace” for pension schemes looking to reduce risk of fluctuating liability values, “making funding levels more stable and pensions more predictable”.

Commenting on the research, XPS Pensions Group, chief investment officer, Simeon Willis, said: “Those investors who initially dismissed LDI as being an elaborate solution to a theoretical problem weren’t seeing the bigger picture.

“We’ve known for some time that LDI, at its heart, protects a pension scheme from lower yield environments, which happens to be exactly the environment we find ourselves in today.”

The survey also found that smaller schemes have been able to access the market, as 92 per cent of new mandates by number were pooled mandates.

River and Mercantile Derivatives managing director, Mark Davies, said: “There are often preconceptions about derivatives that often preclude small schemes, firstly, they are complicated and secondly they are difficult to put in place and implement.

“The options out there for small schemes today are very different to what they were ten years ago, so anyone who is basing their current on what is available ten years ago is missing out on opportunities.”

Willis added: “LDI isn’t about making money, it’s about reducing risk and more schemes, of all sizes, are realising this and taking action. Following another strong year in 2018, we are expecting to see the focus of growth continue to shift towards pooled mandates, as more and more smaller schemes enter the LDI market.

“With DB pension scheme liabilities estimated to total approximately £1.9trn and over £1trn of these hedged using LDI strategies, it shows that trustees, advisers and fund managers are now firmly taking control of their scheme’s future and not leaving it to chance.
This is a great achievement for UK pension schemes.”

Furthermore, 52 per cent of mandates were accessed by via investment platforms, while 86 per cent were hedged using gilt-based derivatives.

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