LDI: House of Lords committee makes recommendations to government ministers

On February 7, 2023, the Industry and Regulators Committee of the House of Lords published a letter to Ministers regarding the use of liability-driven investment strategies by DB pension schemes.

Following market turbulence in September 2022, the Work and Pensions Committee is conducting an inquiry into the lessons to be learned. In advance of minsters appearing before the inquiry, the IRC makes a number of recommendations for long-term steps the Government should take. Recommendations include:

• Conducting a review of pensions accounting standards. At present, accounting standards require sponsoring employers to measure the current value of scheme assets against the present value of future liabilities discounted at a low-risk interest rate. However, the events of September 2022 illustrate the risks inherent in LDI strategies that encourage investment in low-return gilts. 
• Reviewing the investment regulations to establish whether they should set out stricter limits and reporting on the extent of leverage allowed in LDI funds and whether greater liquidity buffers should be introduced for leveraged exposures.
• Ensuring that investment consultants are brought within the FCA's regulatory perimeter as a matter of urgency.
• Considering giving the Prudential Regulation Authority a role in overseeing DB pension schemes. The more “bank-like” strategies and instruments are that are used by pension schemes, the more bank-like their supervision should be.
• Giving the Pensions Regulator a statutory duty or ministerial direction to consider the impact of the pensions sector on the wider financial system. The Financial Policy Committee should be given the power to direct action by regulators in the pensions sector if they fail to take sufficient action to address risks.

Comment

The letter requests a response from Ministers by March 7, 2023. These recommendations, if followed, could result in seismic market and accountancy changes.