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.
The watchdog’s latest guidance, published on October 12, followed confirmation by Bank of England governor Andrew Bailey that the BoE’s gilt-purchasing programme would not be extended beyond its October 14 deadline.
Gilt yields remain buoyant despite the central bank’s attempts to stabilise prices, which have expanded to include index-linked gilts and increase the ceiling for its daily bond auctions. The yield on 30-year gilts rose to 4.92 per cent on the morning of October 12, up from 4.79 per cent at the close of markets.
In addition to guidance for DB schemes, TPR extended its guidance to trustees managing defined contribution schemes, whose members may have been impacted by the decline in the value of gilts in 2022.
He’s upping the pressure on funds to act now and act substantially
Richard Butcher, Zedra
LDI managers could be given more control
Bond markets have experienced high volatility since the government’s “mini” Budget on September 23, which pledged a series of unfunded tax cuts.
Some pension schemes have encountered liquidity pressures as LDI managers issued collateral calls. Companies are facing calls from schemes for the advancing of contributions to help preserve hedging ratios.
The watchdog dismissed speculation that some pension funds had been on the verge of collapse. It attributed liquidity pressures to “the unprecedented speed and magnitude at which gilt yields increased towards the end of September, as well as the ability of schemes and LDI funds to respond to this”.
TPR encouraged DB schemes to review their operational processes, including its governance over buying and selling assets, and decision-making, “such as granting LDI managers power of attorney of some scheme assets to enable swifter trading”.
The regulator urged trustees to consider appealing for accelerated contributions or liquidity through other means.
“A loan arrangement may be an option, but trustees would first need to carefully consider the associated risks and take legal and financial advice,” it said.
“Trustees may only borrow on a temporary basis and for the purpose of providing liquidity to the scheme, and may also be subject to scheme-specific restrictions.”
Trustees should also weigh up whether they have enough liquidity to meet more collateral calls in a volatile backdrop if they choose to maintain a hedged position, as well as whether to reduce this position.
“We expect that some LDI funds are likely to move to a lower level of leverage to better manage their collateral requirements, which will reduce the hedge ratio for investors in those funds,” TPR continued.
“There may be more market opportunities for some schemes to increase or replace hedging or lock in some funding improvements, including access to the insurance market.
“Although there are likely to be capacity constraints in some parts of the bulk annuity market, trustees wishing to explore these opportunities should focus on putting themselves in as good a position as possible for when capacity allows them to move forward.”
The regulator encouraged DC trustees to review their investment strategies, talk to savers approaching retirement, and remain vigilant for scams.
‘You’ve got three days left’
Speaking at an event in Washington, Bailey said that the BoE’s £65bn bond-buying programme would come to a close at the end of the week.
“My message to the [pension] funds is you’ve got three days left,” he said. Funds will continue to have access to a temporary lending facility, which is aimed at helping banks ease the liquidity pressures faced by client LDI funds.
“He’s upping the pressure on funds to act now and act substantially, thus trying to get the biggest bang for his buck,” Zedra managing director Richard Butcher told Pensions Expert.
“Let’s not forget, most of what he said he’d make available has not been drawn down.”
The Treasury Committee wrote to the BoE on October 11 seeking clarity over what more could be done to mitigate the risk to financial stability linked to LDI funds, and whether its temporary lending facility had had its intended outcome.
Following Bailey’s comments, the Financial Times reported that the central bank has privately signalled to bankers that it could extend its bond-buying programme.
TPR: Schemes had right structures in place to face market crisis
The Pensions Regulator believes defined benefit schemes had “sensible waterfall measures in place” to face the collateral calls prompted by rising gilt yields and has advised struggling trustees to speak to their advisers.
Speaking at the opening of the Pensions and Lifetime Savings Association’s annual conference, PLSA chief executive Julian Mund said that he hoped the BoE’s support would be extended until at least the government’s next fiscal event on October 31.
“If they are ended,” he continued, it would be imperative “that additional measures are put in place to achieve market stability”.
When asked what he would do if he were still pensions minister at a subsequent PLSA panel, LCP partner Sir Steve Webb said: “I would sack Andrew Bailey.”
*Additional reporting by Maria Espadinha
