KPMG: Oligopoly developing in LDI market with just three providers managing over 80% of assets, but a greater choice of LDI solutions now available

Key Findings of KPMG Liability Driven Investment (LDI) Survey:

• The number of LDI providers has fallen from 23 in 2007 to 15 in 2010 with the number offering pooled solutions falling from 14 to nine.
• Considerable concentration of overall industry assets across an ‘oligopoly’ of the three largest providers in both segregated and pooled assets.
• Regardless, levels of choice have actually broadened compared to 2007, due to greater variety of solutions available at the remaining managers.

UK pension funds are choosing to spread their liability matching assets across a very small number of fund managers, according to research issued by KPMG’s Investment Advisory Group.

The 2011 KPMG LDI Survey highlights that this is leading to a significant concentration of providers in the LDI market. Despite this, there is still healthy competition and a burgeoning array of LDI solutions available; however KPMG warns that this could change if the number of providers declines further.

The survey has looked at the development of the market in which investment managers use swaps and long term bonds to hedge interest rate and inflation risks, and accounts for the management of over £240bn of UK pension scheme assets.

Simeon Willis, principal consultant in KPMG’s Investment Advisory Group, commented: “Over the last three years we have seen substantial consolidation in the number of managers operating in the LDI market place. There is now something of an oligopoly operating under which just three fund managers are looking after the lion’s share of assets in both the pooled and segregated categories. Whilst the industry assets under management have continued to grow, the number of providers has reduced by around a third. The popularity of the largest LDI providers is having a compounding effect leading to concentration in a small number of managers.”

The survey highlighted that in segregated arrangements where the assets are managed on a bespoke basis, two managers accounted for more than 70% of the total assets under management. This figure was even greater within the pooled LDI fund space where two managers accounted for 80% of the assets under management.

Whilst the survey has highlighted the consolidation in the market, greater variety in types of fund and approach mean a wide range of schemes now have access to sophisticated approaches previously only available to the largest of schemes.

Simeon Willis continued: “We do not believe that the current concentration is hindering competition as there are a good range of alternatives in the market. However there is a possibility that this will become more of an issue if more providers withdraw in the future.”

UK pension funds are increasingly focussing on LDI strategies to better match their liabilities and to reduce volatility of their funding level. Over 20% of the 600 LDI mandates covered by the survey employ some form of market level trigger that is monitored and implemented by the investment manager. This highlights that a large number of pension schemes wish to hedge their liability risks, but not at current market levels.

Tom Brown, European head of investment management at KPMG, commented: “Investment managers are responding to growing client demands by offering increasingly flexible and tailored solutions given the market place is so competitive, and there are currently a number of clear leaders in the market. We are seeing a continuing trend for pension schemes to adopt a plan for reducing risk over time which may lead to a more even split of LDI assets across fund managers.”

Download a full copy of the KPMG LDI Survey (PDF 795 KB)