LDI-related litigation may seem an inevitable outcome of the pension funds crisis of last year, especially as over time it becomes clearer where loss has arisen.
However, US-style class actions are unlikely. Moreover, it is going to take some time yet even for individual claims to materialise.
One likely starting point will be claims against fund managers. Some of the largest fund managers designed and marketed LDI strategies.
Third-party (and currently unregulated) investment consultants who advise on the most appropriate strategies and investments for funds, including strategic asset allocation and asset manager selection, are another obvious target.
If trustees are thought not to have taken sufficient steps to better manage their fund's risk since the crisis last year, they are likely to be tested further.The general view to date is that the pension trustees might avoid the blow, but it is possible they will be targeted too.
Not only might the fund managers and investment advisers turn in their direction when faced with claims, but claims could also be brought directly against trustees for any breach of duty of care or breach of other fiduciary duties owed to the fund beneficiaries.
Trustees may delegate a significant amount of responsibility to their advisers in terms of strategy and investment, but they still carry ultimate responsibility in terms of understanding how these strategies play out, the risks involved and how to mitigate them.
If it looks like there may have been insufficient mechanisms in place to meet margin calls and manage liquidity, the relevant trustees' decision-making will be closely analysed.
There is a further risk to trustees if there is another bout of market disruption, which in current economic circumstances is a possibility. If trustees are thought not to have taken sufficient steps to remediate or better manage their fund's risk since the crisis last year, they are likely to be tested further.
All-encompassing group actions therefore just won't work – the facts are going to be unique to each fund.Having said this, a huge wave of class actions seems unlikely and may, in fact, be unworkable. This is not because of any defences available to fund managers and others, but because any losses will be fact-specific.
Pinpointing sustained loss is going to be difficult for trust beneficiaries, yet would be essential to particularise in any claim. All-encompassing group actions therefore just won't work – the facts are going to be unique to each fund.
In addition, those difficulties in identifying crystallised losses may mean it is some time until we see any claims in this field.
But even if the risk of litigation is low, it seems probable that regulatory action is on the horizon or, at the least, further regulatory input on LDI investments.
The Industry and Regulators Committee added fuel to the push for greater regulatory input on February 7 when it criticised regulators for not focusing sufficiently on the associated risks, and recommended a variety of changes to increase regulatory scrutiny of pension scheme finances and their use of complex financial products, including possible Prudential Regulation Authority supervision.
The expectations of fund managers are not going to change, but the FCA may decide to take action against regulated asset managers.The Financial Conduct Authority put out its statement on November 30 last year on maintaining LDI resilience, and the regulator is expected to set out another statement of good practice before the spring.
The expectations of fund managers are not going to change, but the FCA may decide to take action against the regulated asset managers.
The Bank of England's Financial Policy Committee also identified in its report at the end of last year the regulatory and supervisory gaps in this area and set out a number of recommendations for further consideration.
It specifically said that the FCA and The Pensions Regulator need to co-ordinate with overseas regulators to bring action and to improve the resilience of LDI funds, particularly in light of higher levels of interest and to "withstand severe but plausible market moves".
It seems to be more a question of when, not if, this action will commence.
Helen Carter is senior counsel at Macfarlanes
