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Research

KPMG Survey Finds ‘No End to Growth for LDI’ in UK

UK pensions have more than £900 billion of exposure to LDI.

By Michael Katz

“There appears to be no end to growth” for liability driven investing (LDI), in the UK, according to a recent survey from auditing and accounting firm KPMG. More than 1,800 pension plans now use LDI as a part of their investment strategy, an increase of 27% over last year. There was also £908 billion of exposure to LDI from UK pension plans at year-end, up from £739 billion at the end of 2015.

“The growth in the market in percentage terms has been consistent and relentless,” said Simeon Willis, KPMG’s head of investment strategy. “With this growth has come a change in mind-set. For many the question now is ‘when should we be fully hedged,’ not ‘if.”

However, Willis adds that being fully hedged “presents some new challenges,” because failing to match the hedge to the liabilities can increase the deficit or even create a new deficit after full funding has been achieved.

“This presents a new level of challenge for consultants and providers as well as actuaries to make sure their liability valuation methods are as reliable and accurate as the market values of the matching assets held,” he said.

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Because pension fund liabilities are closely linked to inflation, UK pension funds seeking

assets that are sensitive to inflation usually purchase index-linked gilts, which are bonds issued by the British government. Despite the fact that index-linked gilt yields are “falling to their lowest point this century,” according to KPMG, a growing number of pension plans are using LDI as a risk management tool.

“Over the last five years, liabilities will have typically grown by 30% to 40%,” said Willis, “meaning assets will have needed to outperform to stand still on the value of the deficit, despite being fully hedged.”

The survey also found that:

  • Pooled LDI accounts for almost all the growth in the number of LDI mandates from 2016, and there are now more than 1,200 pooled LDI mandates, an increase of 42% from 2016, and an average size of £100 million of liabilities hedged.
  • Almost all LDI managers surveyed identified regulation as the most important issue facing the LDI industry in 2017. Approximately 44% of managers said the central clearing of derivatives was the most important issue facing the LDI industry, while another 38% cited other regulatory/legislative changes.
  • 80% of LDI managers surveyed expect growth in liabilities hedged to come from new business. This demonstrates that the growth in the LDI market is not expected to stall, says KPMG.
  • LGIM, Insight, and BlackRock continue to be the largest managers within segregated LDI; the same managers, along with BMO and Schroders, are the largest providers within pooled LDI.  BMO in particular managed to win the largest number of new mandates over 2016 with more than 100 new plans.

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Home > News > Newsmakers > Oregon PERS to Lower Fund’s Assumed Rate 0.3%, Increasing Unfunded Liability
Newsmakers

Oregon PERS to Lower Fund’s Assumed Rate 0.3%, Increasing Unfunded Liability

New rate suggested by Milliman based on study.

By Chris Butera

A unanimous vote at Oregon Public Employees Retirement System’s (PERS) July 28 board meeting will lower the pension fund’s assumed rate of return, further straining the long-term budgets of the state’s school districts and other public agencies.

The 0.3% reduction—from 7.5% to 7.2% per year—will add an estimated $2.4 billion to PERS’s unfunded liability, expanding it to $24.4 billion, according to National Public Radio affiliate KOUW.

According to The Register Guard, this is the third time since 2013 that the board lowered its assumed rate of return. The Register Guard also said that prior to 2013, the fund kept a steady return rate of 8% for 23 years.

The move will cause public employers to make more annual contributions into the overall system to meet the required pension payments to retirees. To cover the balance of these payments, PERS will use returns from stocks and bond investments.

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In addition, money from property and tax receipts paid into PERS by government agencies will reduce the available funds agencies have for public services. This includes teachers, police, library staff, and others.

The rate was lowered due to suggestions in a formal report issued to the board by the board’s actuary, Milliman. In the report, Milliman calculated 10- and 20-year data from Pension Consulting Alliance (PCA), primary investment consultant Callan, a 2016 Horizon survey of capital market assumptions, and Milliman data, and determined that the new assumed rate should be between 7% and 7.25%, as told to CIO by Milliman principal, consulting actuary Matt Larrabee.

The report also finds that long-term market projections compiled from Milliman and the PCA would have set the return rate between 6.7% and 7.6% over the next 20 years.

In a statement, Pat McCormick, spokesman for statewide business coalition Brighter Oregon, said “a more realistic assumption is an important first step toward unmasking the severity of the problem.”

The new assumed earnings rate takes effect in 2018.

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