The Pensions Regulator’s lead investment consultant, Fred Berry, has suggested that industry ‘groupthink’ may have played a part in creating the conditions for the liquidity crisis that engulfed defined benefit pension schemes in the autumn.
Schemes raced to secure liquidity in September and October after the government’s doomed “mini” Budget, which was followed by a slump in government bond prices and a spike in yields. Schemes faced collateral calls from managers of their liability-driven investment strategies.
In November, the Work and Pensions Committee was told that around £500bn in assets were “missing” following the crisis, while the Pension Protection Fund warned that the true extent of the turmoil was still unknown.
Legal & General blamed the government for its role in triggering the crisis when it spoke to the Industry and Regulators Committee in the same month.
If there was groupthink it was happening across the industry before, and the regulator has more reflected that than created it
Naomi L’Estrange, 20-20 Trustees
Speaking at an Isio conference during a discussion of the LDI crisis, Berry said: “I do wonder […] whether there is a potential groupthink point.
“What we’ve seen either is a lot of [the] pensions industry doing much the same thing, but when it doesn’t quite work out, people are very quick to accuse the industry of groupthink.
“Whether or not that’s appropriate, I just wonder whether trying to build an industry which is more resilient takes a wider range of inputs [and] listens to some of the voices that aren’t quite singing from the same hymn sheet.”
Should TPR have seen the crisis coming?
Markets have stabilised since former prime minister Liz Truss’s fiscal package was abandoned and the inquisition has begun into the causes of the crisis.
During the volatility, TPR issued guidance urging schemes to “review their liquidity, liability hedging and governance processes, suggesting that managers of their LDIs could be granted power of attorney over some assets to quicken trading”.
The watchdog also informed MPs that it had contacted the BoE and other regulators before the launch of the central bank’s gilt-buying programme, in order to clarify what actions they could take in response to the gilt market turbulence.
On November 30, it backed calls from Irish and Luxembourgish regulators for funds to maintain their improved liquidity buffers. The average yield buffer now sits at around 300 to 400 basis points. This buffer refers to the level of yield adjustment on long-term gilts that an LDI fund is insulated from, or may absorb, before its capital reserves are depleted.
On November 29, Berry told Isio’s fiduciary management conference that the regulator was becoming used to fielding questions on why TPR did not see the crisis coming.
“I don’t yet have a good answer to that,” he admitted.
In response to a claim that groupthink had been driven by regulation, Berry said that he could understand the point, but contended that “the regime in the UK still allows for a fair amount of individual discretion across different schemes”.
Appearing alongside Berry, 20-20 Trustees managing director Naomi L’Estrange noted the regulator’s support of the use of LDI but added" “If there was groupthink it was happening across the industry before, and the regulator has more reflected that than created it.”
A challenging year for fiduciary management
Fiduciary managers have come under scrutiny in the wake of the crisis, with some having been accused of underperforming during the turbulence.
According to new research from Isio, the year to June 30 2022 marked the first decrease in total assets under management in the fiduciary management industry since before 2008, falling 5 per cent to £218bn.
Investment managers have, however, witness the largest increase in the number of full fiduciary management mandates – up 85 per cent from 2021 – relative to specialists, who saw a 9 per cent increase from last year, and consultants, who witnessed a 14 per cent decrease.
TPR expects improved LDI liquidity buffers to be maintained
The Pensions Regulator has set out its expectation that liquidity buffers be maintained across pooled and leveraged liability-driven investment mandates, going beyond the demands of Irish and Luxembourgish regulators.
The change in numbers between investment managers and consultants can be explained partly by consolidation of fiduciary providers within the market, Isio said.
“This year’s market volatility and challenging macroeconomic environment have tested fiduciary managers, shrinking total AUM despite a healthy increase in mandates among the largest and smallest schemes,” Isio head of fiduciary oversight Paula Champion said.
Isio expects AUM for the fiduciary market to have fallen even further since June, given the market volatility that has followed the first half of 2022.
