Some 90% of the UK liability driven investment (LDI) market is dominated by just three providers, according to research by KPMG.
The consultant’s 2013 LDI survey of 30 providers found Legal & General, Blackrock and Insight Investment cover 90% of the market between them in terms of liabilities hedged, with Legal & General accounting for 43% of this alone.
The survey found liability hedging increased by 11% over 2012, from £403bn to £446bn with 686 UK pension scheme mandates now employing LDI.
However, this growth did not come solely from mandates with the big providers as both medium and large LDI businesses added to their business over the year.
And KPMG said there will be continued development of propositions by smaller LDI players looking to challenge the big providers, especially as more than 80% of managers believe their greatest source of new business will come from schemes new to LDI.
“The question remains whether these players can take significant market share from the big three in the segregated space which accounts for the vast majority of LDI assets in the UK,” said KPMG head of LDI research Barry Jones (pictured).
When it comes to pooled solutions, the big three providers account for 61% of the total market.
Elsewhere, KPMG said with continued volatility and uncertainty around the direction of interest rates as the world emerges from the financial crisis, the focus for UK pension schemes is on removing uncertainty, where cost effective, and focusing on seeking opportunities for growth.
The survey found 35% of LDI mandates have triggers so that schemes can take advantage of future rises in yields.
Jones added: “Pension schemes continue to look for ways in which to reduce funding level risk. In an environment where cash is king, derivative based strategies appear to be a popular way of controlling key risks while freeing up assets that can earn a premium invested elsewhere. This is why we have seen growth in both LDI and Synthetic Return Generating strategies over the last year.”
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