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Select Committee · Work and Pensions Committee

Defined benefit pensions with Liability Driven Investments

Status: Closed Opened: 24 Oct 2022 Closed: 6 Dec 2023 8 recommendations 9 conclusions 1 report

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 2022 under its Financial Stability …

Clear

Reports

1 report
Title HC No. Published Items Response
Seventh Report - Defined benefit pensions with Liability Dr… HC 826 23 Jun 2023 17 Responded

Recommendations & Conclusions

3 items
3 Conclusion Seventh Report - Defined benefit pensio… Deferred

UK transposition of IORP allowed leveraged LDI, introducing risks evident in September 2022.

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 derivatives and gilt repo, to continue. Supporters of leveraged LDI …

Government response. 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 …
Department for Work and Pensions
9 Conclusion Seventh Report - Defined benefit pensio… Deferred

Respond to the DB consolidation consultation and prioritise improving trustee regulation and governance standards.

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 not responded to this. Another long-standing question has been whether …

Government response. 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 …
Department for Work and Pensions
13 Recommendation Seventh Report - Defined benefit pensio… Deferred

Consult on introducing LDI disclosure requirements for pension schemes to improve governance.

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 LDI through the annual report or investment statement, would help …

Government response. 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

Oral evidence sessions

5 sessions
Date Witnesses
22 Mar 2023 Andrew Griffith MP · HM Treasury, Laura Trott · Department for Work and Pensions, Lowri Khan · HM Treasury, Tom Josephs · Department for Work and Pensions View ↗
1 Feb 2023 Professor David Blake · Pensions Institute, Bayes Business School, Sarah Breeden · Bank of England, Tim Bush · Pensions and Investment Research Consultants, Toby Nangle View ↗
14 Dec 2022 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 View ↗
7 Dec 2022 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 View ↗
23 Nov 2022 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 View ↗

Correspondence

12 letters
DateDirectionTitle
12 Jul 2023 — Correspondence with the Minister for Pensions relating to the Defined benefit p…
3 May 2023 — Correspondence with the Minister for Pensions and the Economic Secretary to the…
3 May 2023 — Correspondence from the Financial Conduct Authority relating to Liability Drive…
19 Apr 2023 — Correspondence with Minister for Pensions and Economic Secretary to the Treasur…
22 Mar 2023 To cttee Letter from David Roberts, Chair of the Court of the Bank of England, relating …
15 Mar 2023 — Correspondence with the Bank of England relating to Defined benefit pensions wi…
25 Jan 2023 — Correspondence with the Pensions Regulator (defined benefit pensions with Liabi…
25 Jan 2023 — Correspondence with the Financial Conduct Authority (defined benefit pensions a…
25 Jan 2023 — Correspondence with the Pensions Protection Fund (defined benefit pensions with…
12 Jan 2023 — Correspondence with the Government's Actuary Department about the LDI inquiry
14 Dec 2022 — Correspondence with The Pensions Regulator about the defined benefit pensions w…
14 Dec 2022 — Correspondence with the Minister for Pensions about the Committee's inquiry int…