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Pensions Regulator’s commentary and further guidance issued on LDI
Vereinigtes Königreich | Publikation | Oktober 2022
On October 12, 2022, the Regulator published new guidance for trustees of both DB and DC schemes on investment and liquidity management in light of the recent collateral crisis in liability-driven investments (LDI). The statement on matters for trustees to consider was issued in anticipation of the Bank of England’s (BoE) gilts purchase programme ending on October 14, 2022, and in the near-term as schemes navigate continued market volatility.
The rapid rise in gilts yields towards the end of September created immediate “liquidity issues” for schemes using LDI, as providers sought additional collateral. The Regulator states that it expects DB schemes using LDI to seek advice from their investment managers and assess how significantly they have been impacted by market movements.
The Regulator expects DB schemes to:
- Assess their liquidity position and ascertain whether any increase in collateral is needed, including borrowing on a temporary basis from the scheme's employer if the scheme cannot create enough liquidity quickly.
- Review their operational processes to ensure they can react quickly to buy and sell in changing circumstances. This could involve a limited power of attorney being given to the LDI manager.
- Review the funding and risk position for any improvement in funding and the impact on pre-agreed funding triggers and longer-term funding objectives that may have been reached ahead of their target or expected position. Schemes should check if their current risk portfolio is still appropriate.
- Consider other impacts from market conditions. For example, higher gilt yields can have an impact on transfer values so trustees should monitor their current transfer value assumptions and the transfer value basis they use. Market volatility also presents opportunities for scams, and trustees should continue to follow best practice.
For DC schemes, the Regulator advises trustees to communicate with members, especially those nearing retirement and encourage them to maintain a long-term perspective, and to seek financial advice before making hasty decisions. The statement also urges trustees and members to remain vigilant for scams and suspicious transfers.
The Regulator concludes with assurances that it will continue to monitor the situation and will provide further updates "if needed and as the situation develops".
In the event, many of the pension funds that were forced into fire sales of Government bonds after September’s mini-budget, raised enough cash to meet margin calls and rebalance their portfolios. When the BoE ended its emergency purchases of long-dated gilts on October 14, 2022, it had bought up £19 billion in gilts – significantly lower than the £65 billion it had been prepared to buy when pension funds started to struggle to meet collateral calls.
Alex Burghart MP, the new minister for pensions and growth, has said he will consider whether regulatory changes in relation to LDI may increase future stability, although this may well be unnecessary now that most of the tax reduction proposals in the mini-budget have been abandoned, and Liz Truss has resigned as PM.
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