Defined Benefit  

MPs to question DB schemes’ use of LDI in new inquiry

MPs to question DB schemes’ use of LDI in new inquiry

The Work and Pensions Committee has launched an inquiry into the regulation and governance of defined benefit schemes with liability-driven investments.

The central bank announced an emergency £65bn bond-buying programme following the so-called “mini” Budget on September 23, which saw falling government bond prices prompt a series of collateral calls from DB schemes that some feared would lead to a “doom loop” that would crash the market. 

Issues arose specifically around pension funds’ LDI strategies, designed to protect against falling interest rates. Most schemes had conducted stress tests for a scenario in which there was a 1 per cent rise in long-term gilt yields, but the 4 per cent rise exceeded the contingency plans of several, prompting the BoE’s intervention.

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There has been some dispute as to the true severity of the crisis. Several industry experts were quick to reject the suggestion that there could be a widespread collapse of pension funds, and the Pensions Regulator — which some felt should have been more proactive in addressing LDI and its role in the crisis — suggested that most schemes had “sensible waterfall measures in place” to face collateral calls.

To understand what lessons can be learnt from this experience, the Work and Pensions Committee announced on October 24 the launch of a short inquiry, “focusing on the impact of the recent volatility in gilt yields on DB schemes with LDI strategies and their regulation and governance”.

The committee is keen to receive written evidence by November 15 from those with expertise, experience or an interest in DB pensions with LDI strategies, it stated.

The MPs are looking to hear about the impact on DB schemes of the rise in gilt yields in late September and early October, and its effect on pension savers, whether in DB or in defined contribution schemes.

The committee also wants to know if the industry believes that TPR has “has taken the right approach to regulating the use of LDI and had the right monitoring arrangements”, and whether DB schemes had adequate governance arrangements in place.

Looking ahead, the MPs are questioning whether LDI is still fit for purpose for use by DB schemes, and if this experience suggests that other policy or governance changes are needed, for example, to DB funding rules.

Work and Pensions Committee chair Sir Stephen Timms said: “Recent economic volatility and the intervention of the BoE has highlighted the risks of DB schemes using LDIs.

“Our inquiry will examine whether there are sufficient safeguards in place to protect the value of pension funds.

“It will also look at the role of trustees and the regulator in ensuring proper governance arrangements and whether LDIs are still fit for purpose for use by DB schemes.”

The committee stated that it intends to follow work in this area with a further inquiry in 2023 looking at DB schemes more widely, including issues such as scheme funding and arrangements to protect pension benefits when a scheme is wound up.