Recommendation 1

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.