Commenting on the report, IFoA President Matt Saker, said: “We welcome this important report by the Work and Pensions Committee on ‘Defined benefit pensions with Liability Driven Investments’ following the events of September 2022 and its subsequent implications. The report captures the lessons of the crisis and sets out the remedies in governance and other measures which are already, or soon to be in place, including improved data and guidance.”
IFoA Pensions Board Chair Leah Evans gave evidence to the Committee Inquiry in person in November 2022 and again this week (21 June 2023), urging against knee jerk reactions and recommending an approach targeting the cause of the problem, such as further guidance on leverage.
Matt Saker continued: “We are pleased the evidence we provided in oral and written evidence was both useful to, and highlighted by, the Committee in its report, but recognise the Committee’s challenge that “there is still work to be done”, including the introduction of longer term solutions to support the recommendations. The actuarial profession is committed to ensuring we play our part in supporting the reforms needed in the wake of the LDI crisis.
“As we highlighted in our response to the Committee’s live inquiry on Defined Benefit (DB) schemes yesterday, there is an important read-across to the current discussion on scheme funding rules for DB pensions, in particular to ensure that the proposed funding rules are amended to allow genuinely open schemes to be exempt from some of the requirements introduced by the proposed new funding and investment regulations. In addition, it is important that both the Department for Work and Pensions (DWP) and the Pensions Regulator (TPR) work together to ensure consistency between the regulations and the funding code. With the funding code delayed until 2024, there is now an opportunity to look again at the proposals with the Committee’s recommendations in mind. We are happy to engage in discussions with DWP and TPR on this issue.”
Steve Hodder, LCP Partner, said: “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.”
Mike Smedley, Partner at Isio said “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.”
|
