Market moves: A law firm speculates that trustees could be subject to legal action as a result of gilt market instability, the Association of Consulting Actuaries urges defined benefit schemes to review their hedging strategies, and a former pensions minister asks if liquidity pressures will undermine the government’s push for scheme infrastructure investment.
Gilty, your honour
Some trustees could face legal action over their responses to the recent volatility in gilt markets, RPC partner Rachael Healey warned.
“Trustees of pension funds that had to unwind positions and suffered losses or did not react appropriately to instability in the gilt market could find themselves in the line of fire,” she said.
“Trustees are ultimately responsible for the scheme’s investment decisions. If they fail to review the investment position of a scheme or revisit their deficit-reduction plans, then they could find themselves facing legal action.”
Review your hedges
The Association of Consulting Actuaries has advised DB schemes to take another look at their hedging strategies, as markets show signs of settling after the Bank of England’s September intervention.
“When the dust has settled we expect that, in aggregate, recent increases to bond yields will have improved the financial position of DB schemes, [which] typically invest in ways designed to align their assets with liabilities and often with an ultimate goal of securing benefits with an insurer,” said ACA chair Steven Taylor.
“Over the past decade, these investment approaches have worked well and, for example, allowed schemes to emerge strongly from the pandemic when very low interest rates might otherwise have led to significantly higher deficits and funding requirements.”
Taylor pointed to an expected update from the Pensions Regulator to its funding guidance for schemes, “which we expect will continue to encourage schemes to take steps to manage interest rate, inflation and other risks in their investment approaches”.
“It will be important for trustees, actuaries and the wider investment community to work closely with TPR and other regulators,” he advised.
Could liquidity problems discourage illiquids?
Former pensions minister Sir Steve Webb, now a partner at LCP, thinks the government “may need to work much harder to persuade pension funds that investing in illiquids should be a priority at the moment”.
The government has vocally championed schemes helping to unleash a “big bang” in domestic investment. The planned relaxing of the defined contribution charge cap, announced in the September “mini” Budget, is the latest example of regulation being altered to channel pension money into UK infrastructure.
“Cash-strapped governments see pension funds as a key way of raising the finance for long-term infrastructure projects designed to deliver on net zero goals and other government objectives,” Webb said.
“But the current drive for liquidity among DB pension schemes could seriously undermine the push for investment in illiquids.
“Where schemes are now targeting higher levels of liquidity, they are likely to review the long-term assets they already hold and be more wary about taking on new commitments.”
The recent turmoil has not deterred the vast majority of schemes from using LDI. Ninety per cent of more than 400 trustee and company representatives recently surveyed by LCP think that LDI — potentially in a revised form — still has a role to play in pension scheme strategies.
