01/12/2010
By Ilonka Oudenampsen
The number of pension plans adopting liability driven investing (LDI) strategies has remained steady over the past year, according to the annual LDI Global Quick poll from SEI.
The poll shows that half of all pension schemes polled are currently using LDI, compared to 54% in 2009 and only 20% in 2007. The Dutch market leads the way with all respondents implementing an LDI approach, whilst in the UK 67% of respondents are either currently using an LDI approach or will be using an LDI approach in the next year.
The fourth annual LDI poll was completed by 110 executives in the Netherlands, United Kingdom and United States, overseeing pension schemes ranging from US $30 million to more than US $5 billion in assets.
The most popular benchmark for pension investment success remained ‘improved funded status’, selected by 38%. However, this year 22% of poll participants selected ‘minimise or control contributions’, thus surpassing ‘absolute return’ as the second most popular primary benchmark.
Respondents in the UK and Netherlands demonstrate a clear understanding of LDI as an approach focused around risk management rather than an off-the-shelf product. 51.6% of respondents in the UK and 50% in the Netherlands define it as ‘a portfolio designed to be risk managed with respect to liabilities’, compared to 36% and 35% respectively last year.
Organisations continued to make changes to pension investments as two-thirds said they have made an asset allocation change in the past year. Long duration bonds, used by 80% in the UK and 83% in the Netherlands, are the most popular investment product used for implementing LDI strategies. Interest rate derivatives are currently being used by 50% in the UK and 83% in the Netherlands, reflecting the fact that pension schemes in Europe are comfortable with extending their investment toolset beyond the traditional bond space and into derivatives to manage funding risk.
Charles Marandu, director of European advice for SEI’s Institutional Group in the EMEA region, said: “The results of this poll reflect an increased understanding that an LDI approach is useful in managing pension scheme funding levels. This supports our view that LDI is not an off-the-shelf product but is a strategic approach used to achieve funding goals. The high proportion of respondents using derivatives in both the European markets polled demonstrates that decision makers in the UK and the Netherlands are looking to use the full toolset available to manage risk.”
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