Source · Select Committees · Work and Pensions Committee
Recommendation 7
7
Acknowledged
Require TPR to mandate trustee data reporting on LDI and develop engagement strategy.
Conclusion
Leverage may have worked relatively well for pension schemes during a long period of low and volatile interest rates. However, it exposed them to additional liquidity risk and requirements, as collateral demands can change over short periods when interest rates change. With the imposition of much higher capital buffers, the cost of LDI has risen. For schemes in deficit who use these strategies, this may mean it takes longer to reach their long-term objective. Trustee boards will continue to have complex decisions to make about whether and how to use LDI. The experience of September 2022 indicates some will face challenges doing so. TPR should require trustees to report certain data on their use of LDI and should develop a strategy for engaging with schemes based on the results more closely. (Paragraph 81) Governance of LDn risks
Government response summary AI-generated
The government highlights existing legal requirements for trustees to prepare investment principle statements. It states TPR has an existing program to collect data and DWP will consider future changes to disclosure requirements based on TPR's findings.
Summary of the government's response below — read the verbatim text to verify.
Government Response
Acknowledged
HM Government · verbatim extract
Acknowledged
TPR will be using a range of sources to monitor adherence to their guidance on Using Leveraged Liability Driven Investment.1 Levels of buffer in operation will be monitored by TPR in collaboration with the Bank of England and FCA, as recommended by the Financial Policy Committee (FPC) Summary and Record of their 23 March 2023 meeting.2 This data will be collected from LDI managers on a regular basis and covers pooled and segregated funds representing approximately 90% of the market. TPR will be introducing new questions to the scheme return which trustees of DB schemes are required to make to them annually. This will improve TPR’s oversight of asset liquidity outside LDI mandates, so TPR can have confidence that buffers can be replenished in a timely fashion in the event of severe market movements. TPR will also be surveying investment consultants and schemes to check that governance and operational procedures are being implemented in line with TPR’s guidance. Market feedback suggests significantly improved processes have been put in place, but such survey information will help TPR detect and follow up poor practice with individual schemes and their advisers. Governance of LDI risks
Read the full response on Parliament ↗