Source · Select Committees · Work and Pensions Committee
Recommendation 3
3
Deferred
UK transposition of IORP allowed leveraged LDI, introducing risks evident in September 2022.
Conclusion
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. (Paragraph 46) The LDn episode
Government Response Summary
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 failures.
Government Response
Deferred
HM Government
Deferred
DWP published the Government response to the consultation on Consolidation of Defined Benefit Pension Schemes on 11 July 2023,3 which was shortly followed by updated TPR guidance4 for Superfunds. DWP and HMT have undertaken a call for evidence on Pension trustee skills, capability and culture.5 This call for evidence considered trustee skills and capability as well as the role of advice (including that of investment consultants). The aim was to improve DWP and HMT’s understanding of these areas and potentially inform future policy. TPR expects all schemes to have robust controls in place around the use of LDI, as outlined in their guidance on Using Leveraged Liability-Driven Investment. As set out in response to Recommendation 2, TPR plan to monitor adherence with the guidance using a range of sources. Data from the FCA on buffers alongside feedback from leading investment consultancies and LDI managers strongly indicate that operational governance has improved. There is no direct means for TPR to restrict LDI use, as TPR does not set schemes investment strategies, including LDI structures. This is ultimately a decision for trustees and scheme sponsors. However, where TPR identifies failures of governance, it may take action, including, but not limited to, appointing an independent trustee, removing a trustee or taking other enforcement action.