The influential Work and Pensions Select Committee will conduct an inquiry into the use of ‘liability driven investments’ (LDIs) in the pension market.
It says it wants to understand what lessons can be learned, after volatility in gilt markets following the ‘mini-budget’ caused these strategies to unravel, causing liquidity problems for some DB pension schemes. The Committee will also look at whether LDI strategies remain ‘fit for purpose’ going forward.
The Work and Pensions Select Committee says it wants to investigate both the potential effect on DB schemes and their members, as well as looking at whether regulators and trustees are doing enough to mitigate these risks.
The Committee says it wants evidence on whether The Pension Regulator has taken the right approach to regulating and monitoring LDI, given its responsibility for regulating workplace pensions. It has also requested information and evidence as to whether trustees sufficiently understood the risks involved in these investment strategies.
At the start of this inquiry it is calling for evidence from interested parties across the pensions and investment industry.
AJ Bell head of retirement policy Tom Selby says it is important that this inquiry does not stoke further anxieties about the security of DB pensions funds. He says: ““Pensions found themselves caught in the crossfire of the recent crisis that eventually led to a dramatic £65bn intervention from the Bank of England.
“But while clearly there was a significant cashflow issue facing these LDI strategies, reports of pension funds facing ‘insolvency’ were at best hyperbole and at worst downright scaremongering.
“As the Committee digs into what went wrong with LDI funds, it is important consideration is given to the confusing and potentially damaging headlines millions of savers and retirees saw as a result.
“Talk of pensions ‘crisis’ and the risk of pension funds becoming ‘insolvent’ caused lots of people to fear they risked losing their entire retirement pot. This was simply not the case. Even DB scheme members’ pensions would only have been threatened if the sponsoring employer’s solvency was threatened – and nobody was arguing this would happen.”
He adds: “Clearly part of the challenge here is to redouble efforts to boost engagement and understanding around retirement issues. But it is also crucial the Committee reflects on the role of those involved in disseminating complex information to savers, including officials, pundits and journalists.
“The central problem with LDI might have been inadequate preparation for a world of rapidly rising gilt yields, but the way those problems were communicated to the wider public caused untold damage to people’s perceptions of pensions.”