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U.K. LDI strategies record 23% growth in 2016 — survey

The value of liabilities hedged by U.K. defined benefit funds grew 23% over 2016 to 908 billion ($1.17 trillion), said KPMG's latest liability-driven investing survey.

The firm said liabilities were hedged to some extent across 1,808 pension funds, up from 1,423 in 2015. Of the 168 billion growth, KPMG said about 46% came from new allocations and extensions to existing contracts, and the remainder from market movements.

Both pooled and segregated LDI arrangements grew in 2016. The number of pooled LDI arrangements grew 42% to 1,206 plans. The average size of liabilities hedged in pooled arrangements was 100 million. That compared with an average 1.3 billion of hedged liabilities across separate accounts and customized pooled strategies. These arrangements totaled 602 at the end of 2016, up 5% year-over-year.

Legal & General Investment Management, Insight Investment and BlackRock (BLK) continue to be the largest managers running separate account LDI allocations. The three money managers, along with BMO Global Asset Management and Schroders, are the largest providers within pooled arrangements, said the survey.

However, the largest percentage growth in LDI contracts in 2016 came from Standard Life Investments, with 42 compared to nine at the end of 2015. KPMG said this shows "that the LDI industry remains open for disruption."

The number of LDI allocations with trigger-based strategies — using yield, time frame or another type of trigger — fell for the second year running, accounting for 17% of all contracts at the end of 2016. KPMG said that is the lowest point since the firm began its surveys. "The trends illustrate that relatively complicated trigger-based strategies are unpopular with clients new to LDI," said the survey. It added that clients with triggers in place may also be abandoning these arrangements.

In 2015, 22% of pension funds used triggers. Barry Jones, head of LDI at KPMG, said in an email that part of the reason for the decrease in interest is likely due to pension funds not hitting previous yield-based triggers, while others have moved ahead with increased hedging regardless of whether they meet their trigger points.

"This year's KPMG LDI survey confirms that LDI remains the most important derisking tool for U.K. defined benefit pension schemes, with growth continuing to be relentless despite record low yields," said Mr. Jones in a statement accompanying the survey. "Unless the insurance industry creates a lot more capacity for pension schemes, there will be an increased need for well-funded schemes to create their own risk-controlled annuity payment streams over the long term. We expect LDI will become increasingly important in this environment and predict further LDI growth in the years to come."

The survey is available on KPMG's website.