Recommendations & Conclusions
10 items
1
Conclusion
Seventh Report - Defined benefit pensio…
Accepted
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. LDI was an attempt to manage the resulting volatility in …
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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. LDI was an attempt to manage the resulting volatility in funding levels. While this may be appropriate for mature schemes, it is not obviously so for open schemes, for example. One outcome has been a shift in DB scheme investments from equities to bonds—reducing an important source of capital for the UK economy. This must have contributed to recent difficulties in securing investment and growth in the economy. Whether more flexibility could be allowed in the calculation of liabilities is a complex issue to which we will return in our wider inquiry on DB pension schemes.
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Government response AI 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 …
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Department for Work and Pensions
2
Conclusion
Seventh Report - Defined benefit pensio…
Accepted
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 for open DB schemes to thrive in our inquiry on …
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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 for open DB schemes to thrive in our inquiry on DB schemes.
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Government response AI 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.
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Department for Work and Pensions
5
Conclusion
Seventh Report - Defined benefit pensio…
Accepted
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 negatively affected as a result of the events of September
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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 negatively affected as a result of the events of September
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Government response AI 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.
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Department for Work and Pensions
6
Conclusion
Seventh Report - Defined benefit pensio…
Accepted
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 AI 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.
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Department for Work and Pensions
8
Conclusion
Seventh Report - Defined benefit pensio…
Accepted
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, particularly smaller ones which do not benefit from economies of …
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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, particularly smaller ones which do not benefit from economies of scale. As the regulator, with responsibility for standards of governance in workplace pension schemes, TPR was the second line of defence. It issued guidance on managing the risks of LDI but was not able to monitor whether that was being followed. It should have focused earlier on the risks of encouraging trustees to use such complex financial products and worked with DWP to consider what further action was needed to mitigate the risk.
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Government response AI 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.
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Department for Work and Pensions
10
Recommendation
Seventh Report - Defined benefit pensio…
Accepted
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, this is a concern. The Government should bring forward plans …
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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, this is a concern. The Government should bring forward plans for investment consultants to be brought within the FCA’s regulatory perimeter before the end of this Parliament.
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Government response AI 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.
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Department for Work and Pensions
11
Recommendation
Seventh Report - Defined benefit pensio…
Accepted
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 the guidance the FCA issued to LDI funds in April …
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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 the guidance the FCA issued to LDI funds in April has been implemented effectively and is providing trustees with the simple mechanism for monitoring LDI that the FPC said was needed. (Paragraph 108) Managing system risks
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Government response AI 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.
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Department for Work and Pensions
12
Recommendation
Seventh Report - Defined benefit pensio…
Accepted
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 arrangements in which pension schemes may invest and work with …
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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 arrangements in which pension schemes may invest and work with other regulators to ensure these are maintained. TPR does not have the data to check whether its guidance is being followed. DWP and TPR should report back to us by the end of October 2023 on how they plan to monitor whether LDI resilience is being maintained. They should also set out a timeline for TPR’s commitment to become a more digitally enabled and data-led organisation, with plans to resource it.
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Government response AI 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.
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Department for Work and Pensions
14
Recommendation
Seventh Report - Defined benefit pensio…
Accepted
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 needed to improve management of systemic risks in future. It …
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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 needed to improve management of systemic risks in future. It will also be essential that DWP and TPR work with other regulators and the Bank of England to analyse its implications. DWP and TPR should report back by the end of October 2023 on how they intend to ensure this happens. (Paragraph 137) 50 Defined benefit pensions with Liability Driven nnvestments
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Government response AI 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.
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Department for Work and Pensions
15
Recommendation
Seventh Report - Defined benefit pensio…
Accepted
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 that TPR should have the remit to take into account …
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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 that TPR should have the remit to take into account financial stability considerations. Given the events of September 2022, we tend to agree, although it depends on what it means. One possible model would be for TPR to be a source of key information, able to proactively identify potential risks in the sector and then work with other regulators to analyse the implications. DWP should report back to us by the end of January 2024 on how it proposes to take forward the FPC’s recommendation that TPR be given a remit to take account of financial stability considerations and how it plans to ensure that TPR has the capacity and capability to deliver on this.
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Government response AI 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.
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Department for Work and Pensions