Regulator’s report on impact of LDI crisis on DB pension schemes published by WPC

On February 7, 2024, the Work and Pensions Committee of the House of Commons published a lengthy report submitted by the Regulator on the impact DB schemes of the liability-driven investment (LDI) crisis in autumn 2022. The Committee published a report about the episode in June 2023 and asked the Regulator to produce a detailed account of the impact.

The Regulator’s report concludes that, while the situation in late September and early October 2022 bought into focus the extent of DB schemes' investments in leveraged LDI, the movement in gilt values and yields over 2022 actually led to a significant improvement in scheme funding, as liabilities fell by more than asset values.

However, the precise impact for individual schemes will not be known until completion of the next triennial valuation process. Some individual schemes may have experienced funding deteriorations during September 2022 on account of high levels of hedging, the cost of losing and re-acquiring hedging or following discounted selling of assets to meet collateral requirements. While the report models these impacts, the Regulator has no data on the extent and scope of discounted sales for specific schemes.

Since the LDI episode, the Regulator says it has improved its monitoring of such products, and it now receives weekly data from the five UK fund managers that hold almost 90 per cent of the DB market in leveraged LDI assets.

The Regulator's ongoing work includes:

• Improving its monitoring and evaluation of scheme funding, through seeking additional information in scheme returns and under the amended funding regime.
• Developing a dashboard enabling it to monitor the LDI market using the weekly fund manager data referred to above.
• Working with the Bank of England to introduce modelling based on LDI fund manager data to enable the Regulator to estimate the probability of collateral calls being required for specific funds in response to potential future increases to gilt yields.
• Continuing to issue statements or guidance for trustees where this is required. LDI guidance was published in April 2023.