Liability driven investment (LDI) providers are concerned at how regulatory reform will affect their ability to efficiently deliver mandates and the availability of liquidity, according to the Investment Management Association (IMA).
Respondents to the IMA’s 10th Annual Survey 2011-2012 expressed concern about delivering LDI mandates, particularly because of imminent regulation such as the European Market Infrastructure Regulation (EMIR) directive and rules around centralised clearing One respondent said: “I am concerned about the unintended consequences of central clearing… and about the regulators potentially squeezing out risk-reducing activities such as LDI hedging by not recognising the different characteristics of different participants.
“There is a possibility that in making derivative markets more expensive to trade in, you may damage liquidity there, which may then have knock-on consequences on liquidity in the cash markets.” Another added: “Liquidity will be more difficult and will impact how we manage positions. Risk management will have to be re-evaluated, especially in fixed income.
Combined with the increasing cost of long-date swap positions, this means that solutions for pension funds may be narrower in scope and less efficient for clients.”
The survey found LDI mandates represent 32% of third party pension assets in the UK and estimated, after adjusting for sample composition and non-respondents, the wider third party market to be worth £320bn – a 28% increase on last year’s estimate of £250bn.
Elsewhere, the survey found a greater shift towards de-risking among corporate pension funds compared to local government pension schemes, with fixed income mandates a larger component than equities.
Among specialist fixed income mandates of UK third party institutional clients, the largest category was sterling corporate (37%), followed by UK index-linked gilts (20%) with the greatest exposure to the asset class among pension funds at 26%.
Global equities represented the largest specialist equity mandate type across all types of institutional investor (35%), followed by UK equity mandates (31%).Unsurprisingly, the research found equities had fallen out of favour with UK pension funds, falling from around half of total exposure at the end of the 1990s to a fifth of total portfolios today.
One respondent said: “The long-term buyers of equity like insurers or pension funds are diminishing due to Solvency II. The threat of applying insurance Solvency II-type regulation to pension funds will no doubt create a further distortion.”
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