Source · Select Committees · Work and Pensions Committee
Recommendation 1
1
Accepted
Paragraph: 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. 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.
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.
Paragraph Reference:
34
Government Response
Accepted
HM Government
Accepted
DWP continues to work with TPR to understand the impact on pension schemes of the LDI episode. 4 Defined benefit pensions with Liability Driven Investments: Government Response to Committee’s Seventh Report of Session 2022-23 Although DB schemes asset values fell by £400 billion at the end of 2022 relative to the start of the year, the impact cannot be credited solely to the LDI event in the Autumn. Asset values for DB schemes were in decline prior to September’s events and declined throughout 2022 as shown below. This is in part due to rising inflation and interest rates causing a sustained fall in asset values including government bond prices. CPI rose by 10.5% in the 12 months to December 2022, which would have contributed to the fall in asset values across 2022. TPR is conducting further analysis on scheme assets, liabilities and funding changes over 2022. This analysis will consider the key factors which contributed to scheme funding improving or deteriorating, including the role played by LDI strategies. The Committee will be aware of the limitations of data collected by TPR on LDI prior to the events. During the events of last autumn, the FCA and BoE went to the most direct source of data available, which was the LDI funds themselves. Going forward, as discussed at the session, TPR, the FCA and the BoE will be using an enhanced version of this data set to monitor the resilience of the sector. TPR will be augmenting the existing data, with other sources to create a richer picture for the Committee. TPR are working to produce this report by the end of 2023. The PPF use the latest annual scheme returns data provided by TPR when producing their Purple Book (annual publication of data and analysis of the UK DB pension landscape). As such PPF would not hold anything further that would usefully expand upon the data TPR currently hold. Defined benefit pensions with Liability Driven Investments: Government Response to Committee’s Seventh Report of Session 2022-23 5 Future use of LDI