Seventh Report - Defined benefit pensions with Liability Driven Investments
Select Committee
Work and Pensions Committee
HC 826
23 June 2023
Government response
First Special Report - Defined benefit pensions with Liability Driven Investments: Government Response to Committee’s Seventh Report of Session 2022–23 · published 20 Nov 2023
Recommendations & Conclusions
17 results
1
Conclusion
Accepted
Para 34
Accounting standards and funding requirements contributed to LDI and a shift in DB investments.
Conclusion
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. …
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Government Response Summary
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
Para 41
TPR's approach to regulating scheme funding served as a motivation for LDI strategies.
Conclusion
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 …
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Government Response Summary
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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3
Conclusion
Deferred
UK transposition of IORP allowed leveraged LDI, introducing risks evident in September 2022.
Conclusion
The European Directive on the Institute for Occupational Retirement Provision (IORP) contained restrictions on borrowing. In 2005, the UK Government took the decision to transpose it into law in a way that allowed existing investment practices, including the use of …
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Government Response Summary
The government highlights past actions like publishing guidance and calls for evidence. It states TPR has no direct means to restrict LDI use as it's a trustee decision, though TPR will monitor adherence to guidance and take action on governance failures.
Department for Work and Pensions
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4
Conclusion
Acknowledged
Para 54
Prevent DB pension scheme investments from jeopardising the UK economy in future.
Conclusion
Sharp rises in gilt yields which LDI funds lacked the resilience to manage, led to the Bank of England having to intervene in September 2022 to protect financial stability. DB pension scheme investments must not be allowed to jeopardise the …
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Government Response Summary
The government acknowledges the concern by welcoming the Committee's separate recommendation to bring investment consultants under FCA regulation. It states it will consider this as part of a call for evidence and take various views into account for future steps.
Department for Work and Pensions
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5
Conclusion
Accepted
Concerns raised about the reliability of reported pension scheme funding level improvements.
Conclusion
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 …
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Government Response Summary
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
Para 72
FPC guidance protecting financial stability welcomed, awaiting Bank of England stress test results.
Conclusion
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 Summary
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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7
Conclusion
Acknowledged
Require TPR to mandate trustee data reporting on LDI and develop engagement strategy.
Conclusion
Leverage may have worked relatively well for pension schemes during a long period of low and volatile interest rates. However, it exposed them to additional liquidity risk and requirements, as collateral demands can change over short periods when interest rates …
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Government Response Summary
The government highlights existing legal requirements for trustees to prepare investment principle statements. It states TPR has an existing program to collect data and DWP will consider future changes to disclosure requirements based on TPR's findings.
Department for Work and Pensions
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8
Conclusion
Accepted
Para 91
TPR inadequately managed risks from complex leveraged LDI encouraged for pension trustees.
Conclusion
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, …
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Government Response Summary
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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9
Conclusion
Deferred
Para 99
Respond to the DB consolidation consultation and prioritise improving trustee regulation and governance standards.
Conclusion
TPR told us that scheme consolidation would help improve scheme governance, by reducing the number of small schemes. However, consolidation needs to be into a safe vehicle, which requires legislation. DWP consulted on DB consolidation in 2018 but has still …
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Government Response Summary
The government accepts the FPC's recommendation for TPR to incorporate financial stability considerations and details TPR's ongoing work, including setting up protocols with the BoE, reviewing its approach to external risks, and researching non-LDI trends. It does not address the specific deadlines or actions requested in the recommendation.
Department for Work and Pensions
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10
Recommendation
Accepted
Para 105
Bring forward plans to bring investment consultants within the FCA regulatory perimeter.
Recommendation
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, …
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Government Response Summary
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
Work with the FCA to review effective implementation of LDI fund guidance for trustee monitoring.
Recommendation
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 …
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Government Response Summary
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
Para 124
Report back on LDI resilience monitoring plans and TPR's digital transformation timeline.
Recommendation
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 …
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Government Response Summary
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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13
Recommendation
Deferred
Para 127
Consult on introducing LDI disclosure requirements for pension schemes to improve governance.
Recommendation
In addition to putting in place mechanisms to provide real-time warning of reductions in LDI resilience, the Department for Work and Pensions and The Pensions Regulator should consult on whether introducing disclosure requirements on pension schemes relating the use of …
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Government Response Summary
The government states existing law requires statements of investment principles and TPR is already collecting data; DWP will consider whether changes to disclosure requirements are appropriate in light of TPR’s findings, deferring a direct commitment to consult on new requirements.
Department for Work and Pensions
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14
Recommendation
Accepted
Report back on plans for analysing LDI data implications with other regulators.
Recommendation
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 …
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Government Response Summary
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
Para 140
Report back on giving TPR a financial stability remit and ensuring its capacity.
Recommendation
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 …
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Government Response Summary
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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16
Recommendation
Accepted in Part
Para 149
Halt plans for new funding regime until full impact assessment is produced.
Recommendation
There are two fundamental concerns with the new funding regime. One is that the approach is not sufficient to allow open schemes to thrive. This is an issue to which we will return in our wider inquiry on defined benefit …
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Government Response Summary
The government rejects halting plans for a new funding regime, stating the draft Regulations will be laid in due course, but commits to accompanying them with a full impact assessment considering financial stability and open DB schemes.
Department for Work and Pensions
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17
Recommendation
Acknowledged
September 2022 demonstrated systemic risks from DB scheme investment strategies.
Recommendation
The September 2022 episode demonstrated the potential for the investment strategies used by DB schemes to give rise to systemic risks. While action has been taken to address some of the weaknesses which were exposed in this episode, there is …
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Government Response Summary
The Government welcomes the Committee’s report and indicates progress to date and proposals for future work to address each recommendation.
Department for Work and Pensions
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