Pension trustees urged to renegotiate LDI fees to cut costs

Defined benefit (DB) pension schemes using a liability-driven investment (LDI) strategy have been encouraged to drive a 'harder bargain' with asset managers, after LCP reported saving its clients a collective £5m per annum by renegotiating fee levels.

LCP said that it had made the savings through the combined negotiating power of the schemes, arguing that improved outcomes can be achieved without the need to employ fiduciary managers to act on the scheme’s behalf.

The firm also noted that many schemes will be reviewing their inflation hedging strategy and highlighted this as an opportunity to review and renegotiate LDI fees as a whole, particularly if there had not been reductions in recent years.

In addition to this, LCP encouraged schemes to review their LDI manager periodically, suggesting that they might be able to secure better value by switching where appropriate.

The use of bespoke single funds, rather than pooled funds, was highlighted in particular as one way to achieve better value, as LCP argued that falling feels have made bespoke funds economical for most schemes who are hedging over £200m.

“In a high inflationary environment and as more schemes are heading to maturity, LDI strategies are becoming even more important," LCP investment team partner, Gavin Orpin, commented.

"The market is also becoming much more competitive on fees and we are seeing clients achieve really impressive fee savings. This can be achieved without needing to use fiduciary managers to act on behalf of the scheme.”

LCP investment team senior consultant, Rory Sturrock, added: “Bespoke LDI funds used to be only for larger pension schemes. But the advantages of using bespoke funds are now available to smaller schemes as fee levels come down, and we expect this approach to become more prominent.

"For any scheme adopting an LDI approach, now is the time to review both strategy and fee levels”.

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