Select committee: Work and Pensions Committee
Conclusion 3
Seventh Report - Defined benefit pensions with Liability Driven Investments
Published 23 Jun 2023
Paragraph 46
Addressed to Department for Work and Pensions
Work and Pensions Committee Defined benefit pensions with Liability Driven Investments All items in this report Report on parliament.uk ↗ Inquiry on parliament.uk ↗
Conclusion (the committee's words)
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 argue that it helped improve scheme funding levels. However, it introduced new risks, making pension funding levels very sensitive to changes in gilt yields. These risks needed to be understood, with adequate arrangements in place throughout the investment chain to manage them. Deficiencies in this became evident in the LDI episode in September 2022.
From: Work and Pensions Committee, Seventh Report - Defined benefit pensions with Liability Driven Investments (HC 826), paragraph 46, 23 June 2023
Government response
The government responded to the whole report on 20 November 2023 (deadline 23 August 2023).
Summary written by Accountability Index from the government's response. It is not the government's own words.The Government "welcomes the Committee's report" and sets out progress and proposals for future work on each recommendation, with some recommendations met through regulator monitoring and others left to later consideration.
- On investment consultants, the Government "welcomes" the recommendation to bring them within the FCA's regulatory perimeter, but commits only to take the Committee's views into account as it "assesses its next steps".
- On financial stability, the Government "accepts the FPC's recommendation" that TPR should incorporate financial stability considerations in its decision making and balance them with its objectives as a pensions regulator.
- On the Committee's call to halt the new funding regime, the Government does not say it will halt it. DWP plans to lay the draft regulations "in due course", accompanied by a full impact assessment.
- On disclosure requirements for LDI use, DWP "will consider, in light of TPR's findings, whether changes to disclosure requirements are appropriate". TPR's analysis of 2022 scheme data is to be produced "by the end of 2023".