For further information on the circumstances that led up to the LDI crisis and the initial action taken to stabilise the LDI markets, please see our previous February 2023 update and our June 2023 update.

Further background

The WPC launched an inquiry in October last year into the use of LDI in DB pension schemes, following the events of September 2022 in the aftermath of the “mini budget”.  Evidence was requested on various matters relating to the LDI crisis, including in relation to the Pensions Regulator’s approach to regulating and monitoring LDI and whether DB schemes had adequate governance arrangements in place to cope with what happened.  Oral evidence was heard late last year and earlier this year and further regulatory interventions followed, including the publication of detailed guidance from the Pensions Regulator on the use of LDI arrangements in April 2023. The final WPC report was published on 14 June, and much of the report focused on the WPC’s recommendations for the industry and its regulators. 

Focusing first on the recommendations that are most likely to lead to additional or altered obligations for trustees, we would draw out the following as being most relevant:

• The Pensions Regulator should require trustees to report certain data on their use of LDI and should develop a strategy for engaging more closely with schemes.
• In addition to putting in place mechanisms to provide real-time warning of reductions in LDI resilience, the DWP and the Pensions Regulator should consult on whether introducing disclosure requirements on pension schemes relating to the use of LDI through the annual report or investment statement would help improve standards of governance. Particular consideration should be given to: 
  • The maximum leverage allowed in the LDI funds in which the scheme is invested
  • The type of LDI the trustees invest in
  • Compliance with minimum resilience levels
  • Data on the pension schemes’ asset allocations, by growth and matching assets. 

In terms of related recommendations which are likely to affect wider areas of Government and regulatory policy, the WPC also recommended that:

• The DWP and the Pensions Regulator halt their existing plans for a new funding regime, at least until a full impact assessment has been prepared.
• The DWP respond to its consultation on DB consolidation no later than the end of October 2023, and it should then work with the Pensions Regulator “as a priority to improve the regulation of trustees and standards of governance”. Please note that the Government published its consultation response on DB consolidators on 11 July, together with a separate “call for evidence” on pension trustee skills, capability, and culture. We will be reporting on these developments separately. 

The WPC noted that their key concerns with the DB funding proposals, as currently formulated, were that the proposed approach was not sufficient to allow open schemes to thrive and that they will result in greater “herding” in investment decisions by trustees (i.e., a majority of trustees following similar funding and investment strategies, thereby exacerbating systems risk to the economy). In relation to further DB consolidation, the WPC commented that this was a step towards improving trustee governance.  The WPC even suggested that, whilst these governance improvements are carried out, the DWP should consider whether the use of LDI by trustee boards should be restricted, for example by reference to a test related to a trustee board’s ability to understand and manage the risks involved.  

The WPC also included various recommendations for the wider industry, together with expected timescales.  These include a swathe of further Government and regulatory reports, including a DWP, Pensions Regulator and PPF account of the impact on pension schemes of the LDI episode (due by the end of the year), a further report from the DWP and the Pensions Regulator on how they plan to monitor whether LDI resilience is being maintained and a DWP report on how it proposes to take forward the FPC’s recommendation that TPR be given a remit to take account of financial stability (potentially in its statutory objectives).   The report also recommends the bringing forward of Government plans for investment consultants to be brought within the FCAs regulatory perimeter.

Next steps

The Government is due to respond to the WPC’s report by 23 August 2023. While the WPC report only contains recommendations for the pensions industry and they have no formal legal status, we would expect the DWP and the Pensions Regulator to be directed by the report’s findings. Trustees need not take any immediate action in relation to the WPC’s report at this stage, and should continue to comply with the Pensions Regulator’s current guidance on LDI arrangements. However, trustees and their investment advisers should be mindful of the Government’s possible direction of travel in this area in the future, which is likely to involve closer monitoring and further supervision of trustees’ LDI arrangements.