British Pensions Regulatory Overhaul Spurred by Mini-Budget Chaos
(28 June 2023 – United Kingdom) British lawmakers are urging regulators and the government to restrict pension schemes use of derivatives products such as Liability Driven Investments (LDIs).
LDIs, a hedging strategy used by many schemes to ensure assets generate enough capital to meet liabilities, are viewed by many as bringing the United Kingdom (UK) pension industry alarmingly close to catastrophe in Q3 2022 when former Prime Minister Truss unexpectedly announced tax cuts without funding approval. As a result government bond yields jumped sharply. compounding volatility in debt capital markets on the back of PM Liz Truss disastrous "mini-budget".
Regulators have now instructed LDI managers to require schemes post more collateral and cut leverage to lower the risk of reoccurrence in the face of adverse market conditions.
LDI proponents believe the strategy has helped schemes close funding deficits and when used appropriately can continue to play an important role in managing risk. The Pensions Regulator (TPR) should ensure schemes using LDIs maintain minimum levels of resilience after expanding to as large as GBP$1.6 trillion.
“The pension establishment had downplayed the risks of rising rates before, during and after the crisis. So long as we have the herding of vulnerable trustees by blinkered consultants, we may well have another blow-up” commented AgeWage Founder, Henry Tapper.
“Non-expert trustees use of complex financial products is equivalent to them being armed with a gun without a firearms license" Tapper added.
“Recent jumps in bond yields have tested the resilience of LDI funds, but that they appear more resilient today thanks to bigger buffers” a BoE policymaker stated.