Navigating the UK LDI Market - KPMG in the UK |...

INVESTMENT ADVISORY

Navigating the UK LDI Market

2014 KPMG LDI Survey

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© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

2 | ExEcuTIVE SuMMARY 2014 KPMG LDI SuRVEY | 3

“”

KPMG has again produced the definitive snapshot of the UK LDI Market

Executive summary © 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with

KPMG International Cooperative, a Swiss entity. All rights reserved.

2013 saw continued exponential growth in the UK Liability Driven Investment (LDI) industry with the number of mandates increasing by 142 (21%) and total pension scheme liabilities hedged breaking through the £0.5 trillion mark.

15 years ago, even the most informed trustee, advisor or asset manager might not have known the meaning of the acronym LDI. Today, the total market exposure of the uK Liability Driven Investment industry is over half a trillion pounds at the end of 2013, making it arguably the largest single investment exposure that uK Defined Benefit (DB) pension schemes have.

The spiralling growth in LDI has primarily been driven by the DB industry’s desire (both from a trustee and sponsor perspective) to control and manage risk within pension schemes. The techniques used within LDI permit significant risk mitigation without the need to tie up large amounts of capital – thus freeing up assets for trustees to seek opportunities elsewhere to cheapen the long term cost of funding the pension scheme.

Over the past 10 years, asset managers have built up their LDI teams and administrative infrastructure, sharpened their LDI offerings and created platforms for pension schemes of all sizes to access. This perfect combination of pension scheme demand and ever improving supply from hungry asset managers competing for market share, has created one of the fastest growing and innovative investment areas for pension schemes.

This year’s survey builds upon our previous four annual surveys, creating a comprehensive snapshot of the LDI market as it stands today.

We would like to thank all managers for their participation in the survey.

We note that all data has been provided to KPMG by the asset managers participating in the survey with the exception of the bond market pricing information which is sourced from the Bank of England.

Simeon Willis, Head of Investment Strategy LDI in wider strategy context

LDI has proven it is capable of sparking fierce debate at the heart of strategic decision making.

Investment decisions can now be sliced in many different ways. No longer is it just “How much growth exposure?”, “How much matching?” It’s now possible to have both, in plentiful measures. Put another way, given the wealth of LDI and structured products available, it is possible for schemes to “have their bond and eat it too”.

Greater choice demands a more considered debate, where the merits of individual risk exposures need to be assessed and addressed individually. Whatever your view, be it that any hedging at these levels would be madness or that the only madness would be not hedging, this year’s LDI survey shows that these issues have

gendas. never been higher up on pension schemes’ risk a

“” Barry Jones, Head of LDI My take on the LDI industry

Leading the LDI research at KPMG at this time is a real pleasure. The very nature of LDI means that the industry is laden with exceptionally gifted characters. I can genuinely say that the uK LDI industry should be extremely proud of itself for how far it has come and the standards of excellence that it operates at.

2013 has seen the industry grow by another 20%. The established players have continued to bulk out their already impressive teams and invest further into systems and infrastructure. Likewise, there continues to be a real push from the smaller players wanting to get in on the action.

Whilst I fully expect the Big 3 to retain the lion’s share of business, it will be intriguing to watch who is winning the most mandates going forward – there are so many quality providers, each with their own specialism and appeal.

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2014 KPMG LDI SuRVEY |

5 4 | ExEcuTIVE SuMMARY

Key headline trends The LDI market smashes through the £0.5 trillion barrier

> 2013 witnessed further rapid growth of the LDI industry. The number of LDI mandates increased by 142 to 825 and the total liabilities hedged increased by £74bn to £517bn.

> With ongoing demand to de-risk, pension schemes looking to bank the gains from the continued equity market rally, and with 30% of existing mandates having triggers in place to extend further, we expect this growth to

continue into 2014 and beyond.

Mandate growth split evenly between pooled and segregated

> LDI was once the domain of large pension schemes with the scale to enter into transactions directly with sell-side investment banks in segregated mandates.

> Around half of the growth in number of mandates in 2013 came from pension schemes allocating into pooled LDI funds, strongly confirming that LDI is accessible for all pension schemes.

Do the “Big 3” still dominate? Yes, but…

> Legal and General, Insight and BlackRock, the so called “Big 3”, remain firmly in place as the dominant providers of LDI in the uK, capturing 85% of the liabilities hedged. In segregated and bespoke pooled mandates, the “Big 3” make up 86% of the market and in pooled LDI mandates accounts for 72%.

> Legal and General remain the largest LDI manager in the uK. They represent 44% of the uK LDI market, hedging a total of £229bn of uK pension scheme liabilities.

> However, in pooled LDI, competition for business is fierce. When viewed from a perspective of mandate numbers, F&c are ranked number 2 and Schroders are only a

fraction behind Insight and BlackRock.

Small schemes appear to be the slowest to adopt LDI

> Only 21% of mandates, by number, relate to schemes with total liabilities below £50m. Whilst there appears to be plenty of opportunity for small schemes to access well structured and good value pooled vehicles, it seems that the demand from small schemes is much less than from larger schemes.

Growth in the use of swaption strategies

> 2013 has witnessed a significant growth in the use of swaptions, with the notional exposure increasing from £17.7bn to £27.9bn.

> It appears that this is a very specialised area of the market (and primarily occupied by large schemes) with only 25 pension schemes currently utilising this approach. One manager stated that their noteworthy growth was due to significant client education efforts over the previous two years – so, looking forward, this space might see a steady upwards trend.

> Surprisingly, growth has been more muted in the other Synthetic Return Generating approaches over 2013 and in certain approaches there has been a retraction.

Pension schemes have equal demand for hedging inflation and interest rates in 2013

> Over 2013, the c.20% increase in liability hedging has been shared equally between inflation and interest rate protection. This bucks the trend from last year, where inflation

hedging was the most in demand.

The fund management industry remains optimistic in its outlook

> The majority of managers expect interest rates and real yields to rise in line with or above what is currently priced into the market in the next three years. However, we do know that the market has the ability to surprise even the most informed investors.

> Data from our 2010 survey shows that the average asset manager at that time expected that long dated yields would rise over the next 3 years. A combination of central policy, political intervention and market events have led to these expectations not coming to fruition. It is essential for pension schemes who are tactically holding back from hedging to ensure it is a risk that they can genuinely

afford to run.

17%

growth in liabilities hedged

825 LDI mandates30%

of mandates use triggers 85% Market share of the ‘Big 3’

only 21%of mandates relate to schemes below £50m

£500,000,000,000 of liabilities hedged

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6 | WHAT IS LDI? 2014 KPMG LDI SuRVEY | 7

What is LDI?

LDI or ‘Liability Driven Investment’ has evolved a number of definitions. It captures the ethos of investing with a view to meeting your future liabilities rather than simply delivering a positive investment return. This can be achieved using approaches ranging anywhere between simply increasing duration of a gilt portfolio, to the use of a more sophisticated overlay strategy using instruments such as swaps.

LDI is a key risk management tool given the impact that movements in liabilities have on scheme funding levels and deficits.

For the purposes of this survey KPMG has defined an LDI mandate as one which either has some sort of liability cashflow benchmark, or uses derivatives to gain exposure to nominal interest rate, real interest rate or inflation hedging, primarily for the purpose of liability risk management. Mandates simply with broad bond or gilt index benchmarks have been excluded, as have single stock funds.

“” Liability Driven Investment is a vital risk management tool, but can be susceptible to acronyms and jargon

Key terms used in this report

LDI can be a technical topic, so for ease, we briefly define some of the key terms used in this report below.

> Notional Value This is the value of liabilities whose interest rate or inflation risk has been hedged.

> PV01 A measure of the sensitivity of a pension scheme’s asset or liability value to changes in interest rates. It is the change in present value of the asset or liability for a 1 basis point (or 0.01%) change in yields. It is commonly used in swap markets as a convenient summary measure of trade size as it captures both notional value and duration in one figure.

> IE01 A measure of the sensitivity of a pension scheme’s asset or liability value to changes in expected inflation. It is the change in present value of the asset or liability for a 1 basis point change in inflation, and is also known as ‘Inflation PV01’.

> Swap A contract where two parties agree to pay the other a series of cashflows based on an agreed economic variable or interest rate. It is a way of trading different risks, for instance interest rate or inflation risks.

> Synthetic Derivative strategies that are designed to replicate the performance of an underlying asset without a physical holding.

What is LDI?



98 2014 KPMG LDI SuRVEY | | WHAT IS LDI?

“”KPMG is highly experienced in advising on all aspects of LDI. In addition, KPMG has proven capability to integrate these decisions with wider pensions risk management

KPMG and LDI

KPMG is a leading specialist advising pension schemes and sponsors in relation to asset and liability risk management.

We have been at the forefront of helping clients understand the benefits that an LDI approach can bring, and helping our clients to understand and implement the approach that is most suitable for them.

KPMG has a wealth of tools and experience advising clients in relation to all stages of LDI from:

> Feasibility > Cost/benefit analysis > Hedg e construction

and implementation > Monitoring

KPMG is also deeply experienced in integrating these and other investment solutions with wider risk management tools including funding strategy, benefit changes, insurance products (such as buy in) and longevity hedging to determine the most appropriate arrangement. Our annual LDI Survey is just one example of KPMG’s commitment to investing in high quality research to inform and underpin our specialist advice.

As with all risk management, real time monitoring of progress is essential. To this end, KPMG have developed an interactive online tool, Fusion, which allows trustees and companies to observe up to date movements in their scheme’s financial position. This includes observing the impact of movements in interest rates and inflation, as well as the success of hedging strategies and exploring new possible strategies.

Visit KPMG Fusion www.kpmgfusion.co.uk for more information

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10 | LDI TRENDS IN PENSION ScHEMES 2014 KPMG LDI SuRVEY | 11

LDI trends in pension schemes

“” Over 2013 the total notional value of liabilities hedged by LDI strategies has continued to increase from £443bn to £517bn – an increase of 17%.

This increase has been driven primarily by an increase in the number of mandates.

> The number of LDI mandates in the industry has increased by 21% during the year from 683 to 825.

> Both nominal and real yields have risen by around 0.5% since their lows in April 2013, reducing the cost of LDI implementation and providing some relief for the average pension scheme.

> As can be seen from the first two charts on the right, despite only accounting for 45% of the number of total mandates, segregated mandates account for over 80% of the total notional value of liabilities hedged. This is because a segregated mandate is the typical approach that larger pension schemes tend to utilise.

> However, the proportion of total notional liabilities hedged attributable to segregated mandates actually fell by c.5% from a base of 85% in 2012, despite an increase in liabilities hedged of £38.3bn. This was due to rises in pooled and bespoke pooled mandates.

> The amount of interest rate risk hedging, measured in PV01, has increased from £683m in 2012 to £822m in 2013, which represents a 20% growth in this measure.

> Inflation hedging, measured in IE01, has also increased, moving from £490m to £583m over the year, which represents a 19% growth in this measure.

Notional amount of liabilities hedged for uK pension schemes spllit by type of mandate

£600bn

£500bn

Not

iona

l lia

bilit

ies

hedg

ed

£100bn Segregated

£400bn

£300bn

£200bn

Bespoke Pooled £0bn

2011 2012 2013

Total number of mandates under management

800

700

900

Segregated 200 Bespoke

100 Pooled

0 2008 2009 2010 2011 2012 2013

600

500

400

300

Tota

l man

date

s

Note: Bespoke pooled data captured within pooled and segregated prior to 2011

Total LDI hedging by uK pension schemes – as measured by PV01 and IE01

1600

1400

1200

1000

£m

800

600

PV01 IE01

200

400

2008 2009 2010 2011 2012 20130



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12 | LDI TRENDS IN PENSION ScHEMES 2014 KPMG LDI SuRVEY | 13

In contrast to previous years, we have seen that the proportion of mandates with market level triggers in place has fallen in 2013 when compared to the previous year. From a base of 19% at the end of 2010, 29% at the end of 2011, and 34% in 2012, the proportion of mandates where the fund manager monitors and implements triggers now stands at 30%.

With yields rising through the year, trigger strategies are likely to have been more successful than in 2012; when yields remained broadly flat.

Please note the proportion with triggers surveyed is likely to underestimate the true level as some managers have indicated use of triggers in general but without specific client numbers. In these instances we have assumed no triggers are in use. Market level triggers remain the most popular type of trigger strategy (compared to funding level or time based triggers).

Proportion of clients with triggers in place

Prop

ortio

n of

clie

nts

with

trig

gers

in p

lace

5%

0%

10%

15%

20%

25%

30%

35%

40%

201220112010 2013

Mandates with triggers split by type of trigger

Funding level 16%

Yield based 68%

Combination 13% Time based 3%

Which benchmark?

A key decision for pension schemes using LDI is which benchmark to use. Of the mandates

surveyed, as at the end of 2013, around 54% were using a gilts based benchmark with

35% using swaps. The remaining 11% used a combination, sometimes referred to as ‘best of

both’ approach. As would be expected, we have witnessed little change in these proportions

since last year.

Discretionary or Execution-only?

The overall split between discretionary and execution-only/semi-passive mandates has not

changed significantly since last year. Please note that not all of the managers were able

to provide the data on management bases for their mandates. Our results do however confirm

intuitive assumptions: segregated mandates are managed on a discretion basis and the vast

majority of pooled mandates are managed on an execution-only basis. Noticeably though, the

growing sophistication of the product offering in pooled space means that discretionary mandates

are in place to challenge and even substitute execution-only mandates.

Segregated and bespoke Pooled Discretion 160 84

Semi-passive 74 18 Execution-only 49 112



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14 | LDI TRENDS IN FuND MANAGEMENT 2014 KPMG LDI SuRVEY | 15

LDI trends in fund management

Background

> Most of the survey is based on the responses of 14 LDI providers who have agreed to participate. Aberdeen Asset Management and Scottish Widows Investment Partnership have decided not to participate this year due to an ongoing merger. Following a merger between PSolve and River Mercantile, PSolve’s responses are now presented under the name of River and Mercantile.

> A s we have seen previously in our past surveys, there continues to be a large concentration within the industry amongst the largest providers. However, we have seen that competition and innovation has meant that this concentration has reduced slightly.

Number of mandates split by pension scheme size

> T his year we have added a new question to the survey to capture the split of mandates grouped by size of pension scheme. Not all of the managers were able to provide the data, therefore our conclusions are based solely on the responses we have received.

> W e are surprised to see the limited number of LDI mandates for pension schemes smaller than £50m in size; where there are only 86 mandates currently in place.

> T he results confirmed our intuitive understanding that segregated solutions would be the solution of choice for the larger pension schemes.

> Pooled mandates have proven to be a solution for small sized schemes. Here over 60% of the mandates are managed in pooled funds.

> Medium size schemes appear open to either pooled or segregated approaches.

Number of mandates managed on behalf of pension schemes

Num

ber o

f man

date

s

20

0

40

60

80

160

180

scheme size < £50m scheme size £50m -£500m

scheme size £500m - £5bn scheme size > £5bn

Segregated and bespoke Pooled

140

120

100



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Segregated LDI Key headlines

> The market share of the segregated and bespoke pooled fund market is illustrated below.

> The segregated mandate market share remains concentrated, with the three largest providers accounting for 86% of the market.

> The number of segregated and bespoke mandates rose by 20% over 2013 from 379 to 453.

> Total PV01 for segregated and bespoke mandates in 2013 was £775m; rising by 23% from £632m in 2012.

> Total IE01 for segregated and bespoke mandates in 2013 was £552m which rose 20% from £459m in 2012.

> The smallest segregated mandate was £2.1m and the largest was c.£25bn, which demonstrates the wide range of mandates segregated LDI managers are able to accommodate, despite the pooled approach being the favourite for small sized schemes.

Notional amount hedged in segregated and bespoke mandates

Aviva, £12.0bn

Standard Life, £11.2bn

River and Mercantile, £8.4bn

F&C, £8.0bn

BlackRock, £77.0bn Schroders, £7.3bn

State Street, £7.2bn

Cardano, £6.0bn

Insight, £124.7bn Other, £68.2bn

PIMCO, £3.2bn

Goldman Sachs, £2.4bn

Ignis, £1.4bn

Axa, £0.9bn

LGIM, £220.6bn

Notional amount hedged in segregated and bespoke mandates

Not

iona

l am

ount

hed

ged

£50bn

£0bn

£100bn

£175bn

£150bn

£125bn

£75bn

£25bn

£200bn

£225bn

£250bn

2012 2013

LGIM

Insigh

t

BlackR

ock

Aviva

Standa

rd Lif

e

River a

nd M

ercan

tile

F&C

Schrod

ers

State S

treet

Cardan

o

PIMCO

Goldman

Sachs

Ign

is Axa

Number of segregated / bespoke mandates

Num

ber o

f man

date

s

0

140

120

100

80

60

40

20

LGIM

Insigh

t

BlackR

ock

Aviva

Standa

rd Lif

e

River a

nd M

ercan

tile

F&C

Schrod

ers

State S

treet

Cardan

o

PIMCO

Goldman

Sachs

Ign

is Axa

2012 2013

PV01 and IE01 across segregated / bespoke mandates

PV01

/ IE

01 e

xpos

ures

£50bn

£0bn

£100bn

£150bn

£200bn

£250bn

£300bn

£350bn

PV01 IE01

LGIM

Insigh

t

BlackR

ock

Aviva

Standa

rd Lif

e

River a

nd M

ercan

tile

F&C

Schrod

ers

State S

treet

Cardan

o

PIMCO*

Goldman

Sachs

* Ign

is Axa

* Data not provided



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Bespoke Pooled

We have defined Bespoke Pooled arrangements as client-specific segregated mandates that are

contained within a pooled fund structure. These can provide ease of access for schemes without

lengthy legal setup and counterparty negotiation. We have captured bespoke pooled mandates

within the segregated data given the scheme-specific nature of the mandates and comparable

skill sets required by fund managers. For completeness, we have carved out the managers

that offer these structures and the number and size of the client mandates. The bespoke market

remains relatively small relative to segregated. The smallest bespoke pooled mandate was

£52m and the largest was £6bn.

We note that the numbers in Bespoke Pooled LDI are distorted slightly due to the restructure

of the LGIM “Better Bonds” fund range, which were previously categorised in Pooled LDI. Post

restructure in September 2013 these mandates are now classified in the Bespoke Pooled section.

Bespoke pooled mandate providers

Manager Mandates Notional liabilities hedged LGIM 34 £36.6bn

Insight 17 £20.0bn BlackRock 18 £14.8bn

F&c 6 £3.3bn State Street 1 £1.3bn

Axa 2 £0.4bn PIMcO 1 £0.1bn

Total 79 £76.5bn



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Pooled LDI Key headlines

> The market share of the pooled fund market is illustrated below.

> The number of pooled mandates rose by 22% over 2013 from 304 to 372.

> The pooled mandate market share by notional liabilities hedged remains concentrated, but to a lesser degree compared with segregated. The three largest providers now account for 72% of the market using this measure, compared with 79% last year. This suggests that pooled is an area where the competition has been more successful at winning market share.

> This is further illustrated by the number of mandates, where F&c are now the second most used provider in pooled space and Schroders are only fractionally behind BlackRock and Insight.

– Total PV01 for pooled mandates in 2013 was £46.8m down by 8% from £50.7m in 2012.

– Total IE01 for pooled mandates increased 1% to £31.7m in 2013 from £31.5m in 2012.

> The smallest pooled mandate was £1m and the largest was £663m. This highlights considerable overlap with use of segregated accounts, demonstrating the sophistication of the pooled funds to accommodate larger mandates even where segregated is a viable alternative.

> We note that the numbers in Pooled LDI are distorted slightly due to the restructure of the LGIM “Better Bonds” fund range. Post restructure in September 2013 these mandates are now classified in the Bespoke Pooled section.

Notional amount hedged in pooled mandates

Ignis £0.1bn Standard Life £0.6bn

State Street £1.3bn

LGIM, £8.0bn

BlackRock £5.8bn Insight £5.4bn

F&C £3.2bn

Schroders £2.1bn

Notional amount hedged in pooled mandates

2012 2013

Not

iona

l am

ount

hed

ged

£0bn

£10bn

£8bn

£6bn

£4bn

£2bn

£12bn

LGIM

Insigh

t

BlackR

ock

Standa

rd Lif

eF&

C

Schrod

ers

State S

treet

Ignis Axa

Number of pooled mandates

2012 2013

Num

ber o

f man

date

s

0

120

100

80

60

40

20

140

LGIM

Insigh

t

BlackR

ock

Standa

rd Lif

eF&

C

Schrod

ers

State S

treet

Ignis Axa

PV01 and IE01 for pooled mandates

PV01 EI01

PV01

/ IE

01 e

xpos

ure

£0m

£12m

£4m

£6m

£8m

£10m

£2m

£14m

LGIM

Insigh

t

BlackR

ock

Standa

rd Lif

eF&

C

Schrod

ers

State S

treet

Ignis Axa



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Range of pooled funds

> Building on our analysis on the range of pooled funds in the LDI market, we have again shown the growth of how many

managers offer certain types of pooled LDI products. The below analysis investigates the total number of different pooled fund

ranges (in each category) offered by the LDI industry to uK pension schemes that are still running.

> 2013 has seen continued sophistication in this space and, as such, there is clear growth in the number of discretionary

pooled funds opening.

> Please note that the chart below only includes funds that are currently running. This means that funds which were launched,

for example in 2007, and have since closed are not included.

Types and number of pooled funds (that are still running)

2012

20

13

2014

20

12

2013

20

14

2012

20

13

2014

SWAP GILT DISCRETIONARY Nominal Real Inflation

0

5

10

15

20

25

Num

ber

“” Pooled fund options continue to expand, especially in discretionary mandates; mirroring techniques pioneered within segregated mandates.



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4 | SYNTHETIc GENERATING STRATEGIES 2014 KPMG LDI SuRVEY | 25 2

5 Synthetic

generatingstrategies

Synthetic Return GeneratingStrategies

Pension schemes are increasingly turning toward derivatives in order

to gain access to growth exposures, such as equities and credit. These are

known as synthetic approaches.

We have again surveyed managers on their use of return seeking derivatives

to gauge the trends in this area.

Over 2013, we have seen an increase in the use of synthetic approaches by uK pension schemes, continuing the trend we described last year.

> Swaption exposure showed the biggest increase, rising by 58% over 2013 despite a slight fall in the number of pension schemes utilising them. It appears that the swaption market is the domain of large schemes with the average exposure per mandate being significant.

> Whilst both the number of clients ha ving synthetic equity exposure and notional exposure rose in 2013, the trends of using different derivatives varied compared to last year.

> T he number of schemes using equity futures has increased significantly over 2013. However, in terms of notional value, the growth was much slower, indicating a larger number of mandates with smaller exposure.

> In terms of notional exposures, the use of equity Total Return Swaps (TRS) and synthetic credit increased.

Number of clients using derivatives

Equity

TRS on

ly

Equity

Option

s

Equity

Futures

only

Swaptio

ns

Syntheti

c Cred

it

Mixture

of Eq

uity TR

S and

Equity

Futures

2012 201370

60

50

40

30

20

10

0

Num

ber o

f man

da te

s

Notional exposure by instrument

Equity

TRS on

ly

Equity

Option

s

Equity

Futures

only

Swaptio

ns

Syntheti

c Cred

it

2012 2013£30bn

£25bn

Not

iona

l Exp

osur

e £20bn

£15bn

£10bn

£5bn

£0bn



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26 | OuTLOOK 2014 KPMG LDI SuRVEY | 27

Outlook

Sources of growth in the LDI industry

We have gauged the LDI fund managers’ expectations around the source of new LDI business. We asked the managers:

“What is the most likely source of growth in 2014 for your LDI business?”

> The majority of managers still expect growth to come from new business rather than existing LDI clients either extending their mandates or reaching triggers.

> In fact, no managers thought the main source of growth would be from market level triggers being reached.

> This is consistent with last year’s results with even more managers expecting the growth to come from new business.

Most likely source of LDI ‘risk under management’ growth in 2014 for your business?

Extensions to current LDI mandates advised by client 7%

£2.5bn

New business (from current non-LDI clients and/or new clients) 93%

Where do you think most new mandates will come from for your LDI business?”

> 47% of managers expected new LDI clients to come from untapped LDI business, with 40% expecting to convert existing non-LDI clients.

> Only 13% of managers expect that most of their new business will come from competitors. This suggests there is a continuing trend of limited expectations of changes in the market share.

Where do you think that most new mandates will come from for your business?

Outlook 6

New clients to your firm from other LDI managers 13%

Converting existing non-LDI clients into LDI 40%

New clients to your firm but first time LDI clients

(not from a competitor) 47%



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What is the most important issue for the LDI industry in 2014?”

> The majority expect legislative changes to be the most important. This is likely to include centralised clearing which relates to changes in regulations around how

derivatives are traded and stricter rules governing the levels and types of security that are required. This is likely to have a significant impact on the operational side

of running an LDI business, due to the reliance on derivatives. This has grown from 56% of managers choosing this answer last year to 73% this year.

> No managers believe that counterparty default will be the most important issue for the LDI industry in 2014.

> centralised clearing may also highlight any weaknesses in fund managers’ established counterparty arrangements.

What is the most important issue for the LDI industry in 2014?

Legislative changes (e.g., centralised clearing) 73%

Collateral management (e.g., SONIA discounting)

7%

Counterparty default 0%

Rising yields 13%

None of the above 7%

“How prepared are you for central clearing?”

> Over 70% said they were ready to switch immediately if required, with the remainder expecting to be ready in time for the anticipated

regulatory change. This number has increased from 50% of respondents being prepared for the switch to centralised clearing

last year.

Outlook 6

“” Legislative changes continue to dominate thinking within uK LDI



1Executive summary

2What is LDI?


4LDI trends

in fund management

5Synthetic



Bond market views

Due to the magnitude of the impact on funding levels, having a clear policy on how tactical views influence long term strategy is critical.

We asked all investment managers what they thought about gilt yields and inflation. We summarise the results, which include the responses from a total of 20 fund management houses. The chart on the right illustrates historical 20 year fixed interest gilt and index-linked gilt yields.

This year’s results show that there is more consensus among fund managers regarding gilt yields and inflation, with the majority believing that market expectations are either correct or slightly below where yields will end up.

Nominal and Real 20 year gilt yields

Feb 1

2

Feb 1

3

Feb 1

4

Apr 14

Apr 11

Apr 12

Apr 13

Aug 11

Aug 12

Aug 13

Oct 11

Oct 12

Oct 13

Dec 11

Dec 12

Dec 13

Real 20 y ear gilts Nominal 20 y ear gilts

5.0

4.0

3.0

2.0

0.0

-1.0

Y iel

d, %

1.0

Source: Bank of England

Nominal gilt yields

We asked the investment managers:

“ Where do you expect the 20 year fixed gilt nominal yield to be in three years time relative to what the market is implying?”

The vast majority of managers believe that nominal fixed gilt yields will be in line or higher than what the market is currently implying.

Relative to what is implied by the market, where do you think the 20 year fixed gilt nominal yield will be in three years time?

<-0.5%

In line

-0.5%

to -0

%

+0% to

0.5%

>0.5%

5

10

15

20

25

30

35

40

45

0

F r eq

uenc

y

Real gilt yields


“ Where do you expect the 20 year index-linked gilt real yield to be in three years time relative to what the market is implying?”

The vast majority of managers believe that the 20 year real yield will be in line or higher than what the market is currently implying.

Relative to what is implied by the market, where do you think the 20 year index-linked gilt real yield will be in three years time?

<-0.5%

In line

-0.5%

to -0

%

+0% to

0.5%

>0.5%

5

10

15

20

25

30

35

40

45

0

F r eq

uenc

y

Implied Inflation


“ Where do you expect the 20 year gilt implied inflation to be in three years time relative to what the market is implying?”

The vast majority of respondents believe that inflation will be in line or slightly above what is currently implied by the market.

Relative to what is implied by the market, where do you think 20 year gilt implied inflation will be in three years time?

Outlook 6

<-0.5%

In line

-0.5%

to -0

%

+0% to

0.5%

>0.5%

5

10

15

20

25

30

35

40

45

0

F r eq

uenc

y

KPMG contacts in respect of this survey

Barry Jones, FIAT: +44 (0)161 838 8395 E: [email protected]

Simeon Willis, CFA T: +44 (0)20 7694 4408 E: [email protected]

Your regional KPMG Investment Advisory contacts

London

Patrick McCoy T: +44 (0) 207 311 2393 E: [email protected]

Birmingham

Ben Gold T: +44 (0) 121 609 6098 E: [email protected]

Manchester

Barry Jones T: +44 (0) 161 838 8395 E: [email protected]

Reading

Greg Wright T: +44 (0) 118 964 2276 E: [email protected]

Leeds

Nick Evans T: +44 (0) 113 231 3341 E: [email protected]

Glasgow

David O’Hara T: +44 (0) 141 300 5533 E: [email protected]

Editor: Simeon Willis Authors: Barry Jones and Simon Baker-Munton Data-Analyst: Khristina Kushniruk

Last year’s survey Visit KPMG Fusion

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www.kpmg.com/uk/investmentadvisory

The 2014 KPMG LDI survey has been conducted using information provided by third parties. KPMG does not accept responsibility for the accuracy of the data or information provided herein.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2014 KPMG LLP, a uK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International cooperative, a Swiss entity. All rights reserved.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

Oliver Marketing for KPMG | OM016838A | June 2014 | Printed on recycled material

http://www.kpmg.com/uk/investmentadvisory

mailto:[email protected]








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