The amount of pension scheme liabilities managed using a liability-driven investment strategy to reduce risk increased by 11% last year to £446bn, according to figures published by KPMG today.
The consultancy's research found that 686 UK pension scheme mandates now use LDI, which generally involved hedging the scheme's exposure to changes in interest rates and inflation.
It also found that, while more fund managers were entering the LDI market, it continued to be dominated by three companies - Legal & General, Insight and Blackrock - which between them control 90% of the LDI market's value.
Tom Brown, head of investment management for KPMG in the UK, said: 'Whilst the market continues to be dominated by the "big three", growth has not been confined to them. Fund managers with both medium and large LDI businesses have added to their number of mandates over the year, although at the smallest end of the market the results were more mixed. And the fund management industry is optimistic about the future for LDI.'
Over one-third of the mandates for LDI have extension triggers in place, which means the approach could be used to hedge more liabilities. KPMG noted that the market had witnessed increased appetite for schemes to use wider derivative strategies to capture return-seeking exposures such as equity and credit which could drive returns as well as hedge risks.
Barry Jones, head of LDI research at KPMG said: 'Pension schemes continue to look for ways in which to reduce funding level risk. In an environment where cash is king, derivative based strategies appear to be a popular way of controlling key risks whilst freeing up assets that can earn a premium invested elsewhere. This is why we have seen growth in both LDI and Synthetic Return Generating strategies over the last year.'
KPMG's research also found that 80% of LDI managers expect their greatest source of new business to come from pension schemes which had previously not used an LDI strategy.
Jones said this showed that 'the continued development of propositions by smaller LDI players looking to challenge the market appears fully justified. The question remains whether these players can take significant market share from the big three in the segregated space which accounts for the vast majority of LDI assets in the UK'.