The Pensions Regulator has told MPs that it contacted the Bank of England and other regulators before the launch of its gilt-purchasing programme, to establish what actions they could take in response to volatility in the gilt market.
In a letter to the Work and Pensions Committee dated October 10, TPR chief executive Charles Counsell assured MPs that defined benefit schemes are not on the verge of collapse as a result of market turmoil and liquidity problems, which followed the government’s “mini” Budget on September 23.
The BoE commenced a programme of gilt purchases on September 28 in a bid to stabilise prices. The initiative is due to conclude on October 14.
“As the gilt market instability developed, we established regular contact with the BoE and other regulators about what action could be taken to mitigate risks from rapid changes in the gilt market,” Counsell told MPs.
Fundamentally, it was the bank’s decision to intervene in the way it did
Charles Counsell, TPR
“Fundamentally, it was the bank’s decision to intervene in the way it did.”
Three-fifths of schemes have LDI
DB schemes have faced collateral calls from LDI managers in response to spiking gilt yields. Having sat below 4 per cent prior to the budget, the yield on 30-year gilts leapt to 4.99 per cent on September 27.
After falling in response to the BoE’s intervention, the gilts recommenced their ascent and pushed through 5 per cent on October 12.
The watchdog told MPs that at the end of 2018, there were around 2,400 LDI agreements in place. It expects this to have grown to around 3,000 deals by the end of 2021.
Of these circa 3,000 agreements, TPR expects around 60 per cent to be in pooled funds and 40 per cent segregated. Given there are just more than 5,000 DB schemes in the UK, this means about 60 per cent of pension schemes have LDI, it said.
Sir Jon Cunliffe, the BoE’s deputy governor for financial stability, told MPs that without the bank’s intervention, some LDI investments would have been rendered worthless.
TPR told the Work and Pensions Committee that without the BoE’s intervention, “some schemes would have faced much larger collateral calls and would either have been forced to reduce levels of hedging, or possibly seek support in the form of liquidity from their sponsoring employers to protect their LDI investments”.
“This, in turn, could have had an impact on the scheme sponsor,” it continued. Had a scheme’s deficit increased, this may have required increased contributions from employers.
The regulator did, however, say that the longer-term funding positions of most DB schemes have improved due to the rise in gilt yields. The value of scheme liabilities has dropped by up to 50 per cent for some schemes.
Governance overhaul may be ahead for schemes
TPR issued guidance on October 12 to trustees of both DB and defined contribution schemes, in response to the market turmoil.
TPR moots LDI power of attorney as Bailey rules out more support
The Pensions Regulator has called on defined benefit pension schemes to review their liquidity, liability hedging and governance processes, suggesting that managers of their liability-driven investments could be granted power of attorney over some assets to quicken trading.
It urged trustees to review their liquidity, liability hedging and governance processes, suggesting that LDI managers could be given power of attorney over some assets to ensure quicker trading.
The regulator told the committee that, in addition to its own learning, “there will undoubtedly be lessons for the pensions industry”.
“This may include governance improvements so schemes can react more quickly and make decisions in real time,” it said.
