Defined benefit pensions with Liability Driven Investments

Work and Pensions Committee Closed Inquiry
Opened: 24 Oct 2022 Closed: 6 Dec 2023 Parliament page
Increases in yields on long-dated gilts in late September and early October 2022 meant defined benefit (DB) schemes using Liability Driven Investment (LDI) strategies needed to deal with the rapid increase in collateral required to support the LDI trades. This led to the Bank of England’s announcement on 28 September … Read more
8 Recommendations
9 Conclusions
1 Report
5 Oral sessions
12 Letters
5 Events
Activity timeline 24 events
20 Nov
2023
Report published
12 Jul
2023
Correspondence
23 Jun
2023
Report published
3 May
2023
Correspondence
3 May
2023
Correspondence
19 Apr
2023
Correspondence
22 Mar
2023
Oral evidence
22 Mar
2023
Correspondence
22 Mar
2023
Formal meeting (oral evidence session) · The Grimond Room, Portcullis House
15 Mar
2023
Correspondence
1 Feb
2023
Oral evidence
1 Feb
2023
Formal meeting (oral evidence session) · Room 6, Palace of Westminster
Oral evidence sessions 5 sessions
22 Mar 2023
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Work and Pensions Committee
Andrew Griffith MP · HM Treasury Laura Trott · Department for Work and Pensions Lowri Khan · HM Treasury Tom Josephs · Department for Work and Pensions
1 Feb 2023
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Work and Pensions Committee
Professor David Blake · Pensions Institute, Bayes Business School Sarah Breeden · Bank of England Tim Bush · Pensions and Investment Research Consultants Toby Nangle
14 Dec 2022
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Work and Pensions Committee
Charles Counsell · The Pensions Regulator David Fairs · The Pensions Regulator Evan Guppy · Pension Protection Fund Nikhil Rathi · Financial Conduct Authority Oliver Morley · Money and Pensions Service Simon Walls · Financial Conduct Authority
7 Dec 2022
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Work and Pensions Committee
Abdallah Nauphal · Insight Investment Charles Prideaux · Schroders Investment Management Ltd David Fogarty · Dalriada Trustees Limited Dr Jonathan Lipkin · Investment Association Harus Rai · Capital Cranfield Kerrin Rosenberg · Cardano Investment Rod Goodyer · Barnett Waddingham LLP
23 Nov 2022
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Work and Pensions Committee
Dr Con Keating · Brighton Rock Group Iain Clacher · Leeds Business School Joe Dabrowski · Pension and Lifetime Savings Association John Ralfe · John Ralfe Consulting Jonathan Camfield · Lane, Clark & Peacock Leah Evans · Institute and Faculty of Actuaries Mr Henry Tapper · Agewage Mr Steven Taylor · Association of Consulting Actuaries
Title HC No. Published Items Response
Seventh Report - Defined benefit pensions with Liability Driven … HC 826 23 Jun 2023 17 Responded
Recommendations & Conclusions
10 results
Clear
1 Conclusion Accepted
Seventh Report - Defined benefit p…
Accounting standards and funding requirements contributed to LDI and a shift in DB investments.
Both accounting standards and pension scheme funding requirements contributed to the development of LDI. The requirement to calculate a present value of liabilities using a market-based discount rate resulted in liability levels being very sensitive to changes in interest rates. … Read more
Government Response
DWP is working with TPR to understand the LDI episode's impact, with TPR conducting further analysis on scheme assets, liabilities, and funding changes, including LDI strategies. TPR, FCA, and BoE will use enhanced data to monitor sector resilience, and TPR is working to produce a report by the end of 2023.
Department for Work and Pensions
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2 Conclusion Accepted
Seventh Report - Defined benefit p…
TPR's approach to regulating scheme funding served as a motivation for LDI strategies.
A second motivation for LDI has been The Pensions Regulator’s approach to regulating scheme funding in line with its statutory objectives to protect member benefits and the Pension Protection Fund. We will return to the question of what is needed … Read more
Government Response
The Pensions Regulator (TPR) will monitor LDI adherence, buffer levels, and operational procedures by collecting data from LDI managers, introducing new scheme return questions, and surveying investment consultants and schemes.
Department for Work and Pensions
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5 Conclusion Accepted
Seventh Report - Defined benefit p…
Concerns raised about the reliability of reported pension scheme funding level improvements.
According to TPR the majority of pension schemes emerged from 2022 with improved funding levels. However, external analysis raises questions as to how confident we can be about these improvements. We are concerned that some schemes had their funding levels … Read more
Government Response
TPR is collaborating with the FCA and NCAs to review the effective implementation of LDI guidance, setting clear expectations for trustees, and keeping guidance under review for potential amendments.
Department for Work and Pensions
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6 Conclusion Accepted
Seventh Report - Defined benefit p…
FPC guidance protecting financial stability welcomed, awaiting Bank of England stress test results.
The objective of the latest Financial Policy Committee (FPC) guidance, to protect financial stability is welcome. We look forward to seeing the results of the Bank of England’s planned stress tests, made more pressing by recent rises in gilt yields.
Government Response
TPR will monitor LDI resilience using various data sources and is committed to becoming data-led by developing a Data, Digital and Technology Directorate, approving new digital services, and publishing a data and digital strategy by year-end.
Department for Work and Pensions
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8 Conclusion Accepted
Seventh Report - Defined benefit p…
TPR inadequately managed risks from complex leveraged LDI encouraged for pension trustees.
TPR encouraged pension scheme trustees to use leveraged LDI, which involves complex financial instruments. It continued to rely on them as the first line of defence to manage the risks, despite its longstanding concerns about governance standards in some schemes, … Read more
Government Response
The government states TPR will be collecting LDI data via a collaborative framework with the FCA and BoE, which will be in place by the end of 2023, and refers to recommendation 9 for further details on systemic risk management.
Department for Work and Pensions
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10 Recommendation Accepted
Seventh Report - Defined benefit p…
Bring forward plans to bring investment consultants within the FCA regulatory perimeter.
We heard, including from the FCA itself, that in some cases investment consultants were giving standardised advice, rather than thinking through what was best for the individual pension fund. Given the complexity of the decisions trustees are required to make, … Read more
Government Response
The government plans for DWP to lay draft Occupational Pension Scheme Regulations 2023, accompanied by an impact assessment, which will address the matter of investment consultants and be monitored regularly.
Department for Work and Pensions
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11 Recommendation Accepted
Seventh Report - Defined benefit p…
Work with the FCA to review effective implementation of LDI fund guidance for trustee monitoring.
To play their part in monitoring LDI, trustees need timely and accurate information from LDI funds and advisers. We welcome the fact that the FCA issued guidance on this in April. TPR should work with the FCA to review whether … Read more
Government Response
TPR is closely collaborating with the FCA and NCAs to review the effective implementation of LDI guidance issued to managers and pooled funds, and will keep guidance under review for amendments if required.
Department for Work and Pensions
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12 Recommendation Accepted
Seventh Report - Defined benefit p…
Report back on LDI resilience monitoring plans and TPR's digital transformation timeline.
TPR is working to become a more digitally enabled and data-led organisation but has a long way to go to achieve this. We support the Financial Policy Committee’s recommendation that TPR should specify minimum levels of resilience for the LDI … Read more
Government Response
The government states TPR will use various data sources to monitor LDI resilience and will set out a data and digital strategy by the end of the financial year, building on recent developments like establishing the DDaT Directorate and new recruitments.
Department for Work and Pensions
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14 Recommendation Accepted
Seventh Report - Defined benefit p…
Report back on plans for analysing LDI data implications with other regulators.
Given the extent of leverage and the concentration of DB investments, more should have been done to follow up on the risks identified in 2018 by the Bank of England. Collecting better data on LDI is part of what is … Read more
Government Response
The government confirms TPR will collect LDI data through a collaborative framework with FCA and BoE by the end of 2023, and states DWP, HMT, TPR, BoE, and FCA are working together to better manage financial systemic risks.
Department for Work and Pensions
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15 Recommendation Accepted
Seventh Report - Defined benefit p…
Report back on giving TPR a financial stability remit and ensuring its capacity.
When the LDI episode arose, the Bank of England had to intervene to prevent financial instability. The regulatory framework was complex and fragmentary, and not fit for purpose when it came to managing systemic risks. The Financial Policy Committee recommended … Read more
Government Response
The government accepts the FPC's recommendation for TPR to incorporate financial stability, detailing that TPR is setting up protocols with the BoE, reviewing its risk management approach to include systemic financial risk, and exploring required skills and capabilities with DWP.
Department for Work and Pensions
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Government Response AI assessment · 17 of 8 classified
Accepted 10
Accepted in Part 1
Acknowledged 3
Deferred 3
Total 8 recs + 9 conclusions
Correspondence 12 letters
12 Jul 2023 Correspondence with the Minister for Pensions relating to the Defined benefit pensions with Liability Driven Investments inquiry
Parliament page
3 May 2023 Correspondence from the Financial Conduct Authority relating to Liability Driven Investment guidance
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3 May 2023 Correspondence with the Minister for Pensions and the Economic Secretary to the Treasury relating to Defined benefit pensions with Liability Driven Investments
Parliament page
19 Apr 2023 Correspondence with Minister for Pensions and Economic Secretary to the Treasury relating to the defined benefit pensions with Liability Driven investments inquiry
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22 Mar 2023 To committee Letter from David Roberts, Chair of the Court of the Bank of England, relating to Defined benefit pensions with Liability Driven Investments
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15 Mar 2023 Correspondence with the Bank of England relating to Defined benefit pensions with LDI (follow up to evidence session)
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25 Jan 2023 Correspondence with the Financial Conduct Authority (defined benefit pensions and Liability Driven Investments)
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25 Jan 2023 Correspondence with the Pensions Protection Fund (defined benefit pensions with Liability Driven Investments)
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25 Jan 2023 Correspondence with the Pensions Regulator (defined benefit pensions with Liability Driven Investments)
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12 Jan 2023 Correspondence with the Government's Actuary Department about the LDI inquiry
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14 Dec 2022 Correspondence with The Pensions Regulator about the defined benefit pensions with liability driven investments inquiry
Parliament page
14 Dec 2022 Correspondence with the Minister for Pensions about the Committee's inquiry into Defined Benefit pensions with Liability Driven Investments
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