Defined Benefit pension systems utilising a ‘liability-driven investment’ (LDI) approach should review and renegotiate LDI fees as a whole, according to LCP.
LCP says it has saved clients over £5 million per year over the last year by using the aggregate negotiation power of the schemes they advise. The improved outcomes can be accomplished without the requirement for ‘fiduciary managers’ to intervene on behalf of the scheme, according to LCP.
Many schemes will be examining their inflation hedging approach as a result of high and growing inflation rates, according to LCP, which presents an opportunity to examine and renegotiate LDI costs as a whole. This is especially true if the fees haven’t decreased in recent years. Schemes should also examine their LDI manager on a regular basis and, where possible, switch to get better value.
According to LCP, one approach for schemes to achieve value is to use “bespoke” single funds rather than pooled funds, which have hitherto been preferred by smaller schemes. Single funds, according to the business, are easier to manage than a slew of pooled funds, are better positioned to adjust in the face of fluctuating inflation and can help schemes plan for the long run. LCP says reducing fee levels have made bespoke funds more affordable for most schemes hedging over £200 million.
LCP investment team partner Gavin Orpin partner in LCP’s Investment team says: “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.”
LCP investment team senior consultant Rory Sturrock says: “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”.
