(October 29, 2013) – Almost a third of pensions investors believe liability driven investment (LDI) will be a “very popular” way to de-risk over the next five years, beating longevity swaps and pension buyouts, according to EDM Group.
The information management firm reported that 30% of pension investors thought LDI would be a very popular way to de-risk, with another 24% saying they believed it would be “quite popular”.
Another 31% believed pension buy-ins would be very or quite popular, and 28% believed buyouts would be the de-risking tool of choice. Another 28% said longevity swaps would be very, or quite popular.
However, almost half of respondents were concerned about their standard of data management within their pension funds, saying the poor quality of data and information management is having a “negative” impact on their ability to de-risk schemes.
Only 51% believe that over half of final salary pension data/information is currently stored in digital format but 78.3% think this will be the case in five years’ time.
In addition, 45% expect pension schemes to invest a lot of time and money to improve the quality of data/information they collect over the next five years. As many as half of all investors will choose to hand that responsibility to a third-party.
The research questioned a global audience of almost 200 pension professionals, around half of which were from the UK.
The shift towards LDI could reflect concerns about a lack of capacity for the pension risk transfer market. 2013 has been a record year for buyout and buy-in transactions on both sides of the Atlantic, but many experts have warned that in the longer term, there may be problems as insurers become more selective in choosing deals.
“We can expect to reach a point fairly soon when there will be far more pension schemes wanting to buy out than there is capacity in the market to absorb them,” Alastair Meeks, partner at law firm Pinsent Masons, said in August 2013. “Some, perhaps most, of those schemes are going to find their plans thwarted. The successful schemes will be the schemes that are ready to move fast.”
However, David Collinson, co-head of business origination at Pension Insurance Corporation (PIC), disputed claims of capacity constraints.
“We have plenty of capacity,” he told aiCIO. “And if the market expands, we will raise more capital from investors as we have done in the past.”
PIC has led the field in the UK this year with £2.28 billion of buy-ins and buy-outs announced, giving the company a market share of over 70%.
Watch out for the next print edition of aiCIO, which focuses on the present and future of the LDI market.
Related Content: Risk Transfer: Boom or Bust in 2013? and De-Risking Amid Low Rates? Ditch Your Glide Path, Says Cambridge Associates