BlackRock urges pension funds to split assets in one managers

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BlackRock urges pension funds to split assets in one managers

In New York City, a BlackRock building is seen.

LONDON Reuters -- BlackRock's liability-driven investment business is urging smaller UK pension fund clients to stop splitting assets across multiple managers as it tries to reduce the complexity and risks of a strategy that was disbanded last year.

Asset managers worry that new rules to make LDI investments more robust could make the strategy unviable for some schemes, but consultants warn that BlackRock's push could repel pension clients who want to minimise concentration risk.

The LDI, a hedging strategy used by thousands of schemes to ensure their assets generate enough cash to meet liabilities, almost blew up the UK pension industry in September when the then British Prime Minister Liz Truss' disastrous'mini-budget sent government bond yields soaring.

Pension funds were forced to top up collateral to keep hedges in place, but some schemes in so-called 'pooled funds' couldn't raise cash fast enough and LDI managers cut their hedges, exposing them to losses.

BlackRock is telling some clients that they should move more non-LDI assets to one manager to limit the size of buffers needed to withstand future market shocks, because it would mean easier access to cash.

The Bank of England said on Wednesday that LDI funds would need to increase their liquidity buffers to withstand a 300 -- 400 basis point surge in bond yields. That's three-to-five times more than the average amount held before the September 2022 crisis.

Alex Claringbull, BlackRock's Global Head of Indexed Fixed Income LDI, told Reuters that there will be a trend to put more assets with one manager and that will help increase collateral management optionality.

BlackRock is encouraging schemes to shift to a smaller range of LDI funds that are less complex to operate, and moving bigger schemes into segregated accounts, which fared better in the crisis, according to Claringbull.

Pension consultants warn that if you hold more assets with a single manager, you are at odds with the investment principle of diversification across firms.

Simeon Willis, a consultant from XPS, said that there can be certain situations where it makes sense to have all of your investments with one manager.

He said that clients feel that they are being compromised and that they will look to move assets.

BlackRock, the world's biggest asset manager, competes with Legal General Investment Management and Insight Investment as the three big providers of LDI, which is low-margin but integral to Britain's defined benefit pensions industry.

BlackRock has told clients it remains committed to LDI despite the crisis.

In a note sent to clients this month, Rich Kushel, BlackRock's head of the Portfolio Management Group, said in a note sent to clients this month that they wanted to create more robust LDI solutions.