The use of liability driven investment (LDI) strategies as a means of moving towards buyout has fallen over the past year, research by SEI shows.
In its annual poll of 125 global corporate pensions executives, the fiduciary manager found less than half of respondents (48%) viewed progressing their schemes towards buyouts as a priority, compared with three quarters (75%) a year ago. It said this was due to the sharp fall in funding levels over 2012, making buyouts “inordinately expensive”.
The findings back up a report from Aon Hewitt which suggests the narrowing spread between gilts and corporate bonds has made it increasingly hard for schemes to de-risk and improve returns over the course of the year.
The consultancy’s bulk annuity market update for the third quarter said while the price of bulk annuities is coming down in absolute terms, relative to gilts the price has been going up over the past few months.
Aon said schemes could still purchase annuities for older pensions and non-revaluing benefits at more attractive prices than gilts.
The market update revealed that total bulk annuity business placed during Q3 was £929m, up from £914m in the previous quarter. The number of cases written was unchanged, with 40 completed in each of the last two quarters. Business placed in the first three quarters surpassed that written over the same period in 2011, totalling £2.3bn compared with £2bn.
Aon Hewitt said pipeline activity remained buoyant. Many insurers are bullish, believing appetite is high and a healthy amount of business remains to be completed in the remaining months of the year.
While fewer schemes are using LDI as a route to buyout, more than half (57%) of respondents to SEI’s survey said they use an LDI strategy, with 52% of those allocating more than 40% of their portfolio to an LDI strategy. Over three quarters (76%) of those using an LDI strategy did so in order to “control the year-to-year volatility of their funded status.
SEI Institutional Group director, European advice, David Hickey, said: “The findings of the poll confirm that pension schemes are increasingly focusing their attention on managing the most important aspect of the scheme: funding level. “There is a clear recognition that market volatility shows no sign of abating, resulting in the need for innovative strategies that provide greater strategic control of schemes.”
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