UK - The number of liability-driven investment (LDI) mandates remained static over the last year, according to new research by KPMG, which attributed the freeze to low interest rates and investors adopting a 'wait and see' approach towards the strategy.

However, according to the consultancy's LDI survey for 2012, assets under management rose nearly 30% year on year to £312bn (€372bn), with fixed gilts rising more than 26%, while index-lined gilts appreciated 25.9% in value.

Simeon Willis, principal consultant at KPMG's UK operation, said pension funds were interested in risk reduction through hedging, but were "unwilling" to pursue such an approach while rates remained at such unattractive levels.

Of the 14 managers surveyed by KPMG, half expected real yields to remain flat or fall further over the next three years, offering a "complex" problem, according to the consultancy.

"Many pension funds are still taking a 'wait and see' type of approach, but this 'all or nothing bet' is a risk given the potential for yields to become even less attractive from here," he said.

"The continued decline in yields over 2011 surprised a lot of investors who thought they simply could not get much lower. 

"Consequently, most trigger-based strategies failed to increase the overall level of hedging, thereby failing to protect from the increase in liabilities that correspond to falling yields."

According to the survey, segregated LDI accounts still amounted to three-quarters of all assets at £237bn, despite these accounts only stemming from half of all awarded mandates.

Pooled funds claimed a further 262 of all mandates, while only accounting for £19bn in assets. Managers in bespoke pooled vehicles oversaw the remaining £55bn.

"The largest bespoke pooled investment was very substantial at £18bn, showing that bespoke pooled is worthy of consideration for a very broad range of schemes," KPMG noted.

State Street recently announced its intention to expand its presence in the bespoke market - claiming only a £200m share at the end of last year - with the launch of a "very flexible" service for pension funds in excess of £40m.

At present, the segregated and bespoke market is dominated by three providers - BlackRock, Legal & General and Insight - which combined claimed an 85% share of the market in 2011.

For an in-depth look at liability-driven investing, see the Special Report in May's issue of IPE magazine.

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