Weaknesses in governance, oversight, leverage risks, data collection gaps, and the need for regulatory improvements to ensure financial stability and scheme resilience.has been addressed by the Work and Pensions Committee report
The report on defined benefit (DB) pension schemes with liability-driven investments found that weaknesses in governance and oversight require closer engagement and transparency. The report emphasises the need to address risks and enhance the performance and stability of leveraged LDI in pension schemes.
The report recommends regulating investment consultants under the FCA and proactive monitoring of systemic risk.
Isio partner Mike Smedley says: “Lessons have been learned about how quickly gilts can hit the rocks when markets lose trust in government – with much stronger liquidity and contingency plans now in place across the pensions industry.
“But it’s unfair to blame trustees for risking economic stability. Trustee boards have followed government instructions to prioritise the security of members’ benefits and used LDI to achieve that with huge success.”
LCP partner Steve Hodder says: “We saw the events of September/October last year primarily caused by systemic issues. We are glad that the Committee’s report agrees with this assessment.
“We are pleased that the Committee has given a fair summary of the logic behind schemes using LDI. The vast majority of our clients have continued to use LDI as a core risk management tool. This helps stabilise the assessed cost of the value of their pension promises under generally accepted approaches.
“We are glad the Committee has not been drawn into some of the more hysterical commentary from last year. In particular, suggestions that the concept of leverage itself is inappropriate. Leverage, used sensibly, is a cornerstone of our economy: company balance sheets, individual home ownership and financial risk management. The fault lines that emerged last year were due to political events catalysing systemic volatility that was far more severe than reasonable market participants thought possible.
“We are glad the Committee has focussed on systemic issues rather than the “blame game” that individual investors did not consider their impact on the multi-trillion gilt market. It seems to us very challenging to draw a conclusion that each of thousands of investors should have carried out a systemic risk assessment themselves, especially given the data required to do so was not centrally collected. This, to us, was akin to blaming the person at the back of the cashpoint queue for a bank run.”
“The recommendation to further consider DB consolidation is interesting, given the events of last year highlighted how a concentration of actions can cause market issues. For example, based on our experience, consolidating schemes into fiduciary management did not result in better outcomes.
“From my own perspective, I welcome the calls to reconsider the new DB funding regime, which creates tighter constraints around how Schemes are expected to operate. This is likely to herd schemes into even more similar gilt-based investment strategies.
“We saw last year the potential problems this could cause. In my view, a better use of time would be to focus on incentivising behaviours for better investing these £ 1trn+ assets for the benefit of the wider UK economy whilst appropriately safeguarding members’ benefits and have separately provided our views on this to the WPC.”
