Defined Benefit pension schemes using a ‘liability driven investment’ (LDI) strategy are being urged to drive a harder bargain with asset managers, after consultants LCP secured multi-million pound savings for clients by helping them to renegotiate fee levels.

Liability Driven Investment (LDI) is an investment strategy aimed at investing in assets whose value move in line with a pension scheme’s liabilities. This reduces volatility in funding levels and has been a cornerstone of the most successful investment strategies for UK DB pension schemes in the last decade.

Over the last year, LCP reports that it has saved clients collectively over £5m pa through using the combined negotiating power of the schemes which they advise.  LCP point out that these improved outcomes can be achieved without the need to employ ‘fiduciary managers’ to act on behalf of the scheme.

With high and rising inflation rates, many schemes will be reviewing their inflation hedging strategy and, according to LCP, this provides an opportunity to review and renegotiate LDI fees as a whole.  This is particularly true if fees have not come down in recent years.  Schemes should also review their LDI manager periodically and can secure better value by switching where appropriate.

One way for schemes to achieve value according to LCP is by using “bespoke” single funds rather than the pooled funds which have in the past been favoured by smaller schemes.  The firm argues that single funds are simpler than using an array of pooled funds, are better placed to adapt in light of volatile inflation and can help prepare schemes for their end game.  LCP estimates that falling fee levels mean bespoke funds are now economical for most schemes who are hedging over £200m. 

Gavin Orpin, Partner in LCP’s Investment team, commented: “In a high inflationary environment and as more schemes are heading to maturity, LDI strategies are becoming even more important. The market is also becoming much more competitive on fees and we are seeing clients achieve really impressive fee savings.  This can be achieved without needing to use fiduciary managers to act on behalf of the scheme.”

Rory Sturrock, Senior Consultant in LCP’s Investment team, added: “Bespoke LDI funds used to be only for larger pension schemes.  But the advantages of using bespoke funds are now available to smaller schemes as fee levels come down, and we expect this approach to become more prominent.  For any scheme adopting an LDI approach, now is the time to review both strategy and fee levels”.