MPs question TPR role in LDI market turmoil

In a letter addressed to TPR’s chief executive Charles Counsell, dated October 4, Work and Pensions Committee chair Stephen Timms posed a series of questions regarding the monitoring of defined benefit schemes' liability-driven investments.

He said: “Many people — including members of defined benefit pension schemes and sponsoring employers — will have been extremely concerned to read about the impact on pension funds of the fall in the price of long-dated government bonds last week.”

The BoE announced on September 28 a £65bn bond-buying programme in an attempt to stabilise markets, after falling government bond prices prompted collateral calls for pension funds.

Many people — including members of defined benefit pension schemes and sponsoring employers — will have been extremely concerned to read about the impact on pension funds of the fall in the price of long-dated government bonds last week

Stephen Timms, Work and Pensions Committee

Government bond prices collapsed and yields rocketed after the government’s “mini” Budget on September 23, which pledged extensive tax cuts for businesses and high earners.

Before chancellor Kwasi Kwarteng’s fiscal statement, UK 10-year gilt yields sat at just under 3.4 per cent. They have since risen to almost 4.6 per cent, dropping briefly below 4 per cent following the BoE’s announcement.

LDI is a risk management tool used to protect schemes from adverse movements in interest rates and ensure funding levels do not deteriorate when interest rates fall.

Pension schemes will have plans in place so that if interest rates rise they are required to post collateral, and typically conduct a stress test against a 1 per cent rise in long-term gilt yields.

While schemes have generally coped with the additional capital calls required, an increase of gilt yields to 4 per cent went beyond the contingency plans most schemes had in place, creating stress within the financial system and dictating the need for the BoE intervention.

TPR called to provide analysis

Timms noted that while the BoE’s intervention “appeared to ease the pressure on schemes, there remains concern at what might happen when this intervention ends” on October 14.

Due to this, the Labour MP has requested TPR provides the committee with an analysis of several issues, including whether the root of the issue was “primarily a liquidity problem” and what proportion of schemes use LDI strategies and for what proportion of their investments.

Timms also asked Counsell to clarify if TPR asked the BoE to intervene, and if without regulatory action would the responsibility ultimate fall on sponsoring employers, while querying if there was ever a risk to the Pension Protection Fund.

In relation to TPR’s own approach, Timms questioned if the watchdog still considers LDI to be fit for purpose and if it intends to issue guidance on this matter.

The Labour MP quoted a blog published in August, in which TPR’s lead investment consultant Fred Berry said there was anecdotal evidence that some DB schemes “may have been underprepared, after years of falling interest rates in which LDI funds were paying collateral back to schemes. But we know that advisers were making trustees aware of the risks, and our DB investment guidance covers it too… We remain vigilant to the risks and expect trustees to do the same”.

Timms questioned what TPR was doing to monitor the risk to pension funds and if the watchdog thinks it “should have taken stronger action earlier”.

Pensions Expert reported on October 3 that TPR said DB schemes had “sensible waterfall measures in place” to face the collateral calls and it advised struggling trustees to speak to their advisers.