TPR rejects claim of having pressured schemes into LDI

At a session of the Work and Pensions Committee’s inquiry into LDI and defined benefit schemes on December 14, committee chair Sir Stephen Timms asked the regulator if it had pressured schemes into investing in LDI, despite their own concerns about the product.

“Witnesses in this inquiry have said to us that the policies of TPR are the main reason for pension funds switching from equities to gilts over the past couple of decades,” Timms said.

“Some funds have told us that the regulator has placed them under what they felt was huge pressure to adopt LDI when they didn’t think it was appropriate, and they fear that pressure is likely to increase with the additional powers and penalties TPR now has at its disposal.”

We need to be planning for failure

Nikhil Rathi, FCA

TPR chief executive Charles Counsell replied that “real improvements” in the aggregate funding of schemes had been achieved “because of the way we have encouraged schemes to manage the risks that sit within the schemes”, adding that the watchdog does not dictate to schemes about in what they can invest.

“I’m not sure I recognise the complaint. We don’t put huge pressure on schemes, or indeed on advisers,” he continued.

“What we do is encourage them to manage the risks that they’ve got within their own individual scheme.”

Financial Conduct Authority chief executive Nikhil Rathi also appeared before the committee, telling MPs that there had been “inadequate preparation” by a number of schemes for the autumn liquidity crisis, which saw DB schemes scrambling to sell down assets in order to meet collateral calls in response to a spike in gilt yields.

Is it time to authorise professional trustees?

Timms said he had seen correspondence from the regulator to a scheme that, he claimed, was “pretty firmly pushing them to adopt LDI”.

“What the schemes feel is that now that the penalties you have at your disposal are becoming significantly greater, for them that does feel like very great pressure that they’re being placed under,” He said.

Counsell replied that while he was uncertain of the correspondence that Timms was referring to, “if we feel that schemes are not following the guidance, we may well encourage them more strongly”.

TPR has come under pressure from politicians and commentators over its role in schemes’ use of LDI. It has backed calls from Irish and Luxembourgish regulators for funds to maintain buffers of around 300 basis points. 

Before the September “mini” Budget, 48 per cent of schemes had capital buffers below 200bp to 249bp, according to the Pensions and Lifetime Savings Association.

The regulator expects to publish a new consultation for its incoming DB funding code before the end of the year. On December 13, it said it has lowered the amount of leverage that it deems acceptable for schemes to have to meet the requirements for a “fast-track” valuation.

“Clearly, because of the events through September, we’ve had to look at some elements of the code and we have made changes to it,” TPR executive director for policy, analysis and advice David Fairs told the committee.

“We have strengthened some of the guidance around governance and operational management. We have included the same buffer requirements that we set out in our statement. 

“We have changed the stress test that we are going to apply for schemes that go down the fast-track route.”

TPR is borrowing the Pensions Protection Fund’s stress-testing methodology for the fast-track process, which trustees will be expected to carry out in order to understand their schemes’ levels of investment risk.

Counsell, meanwhile, repeated concerns he expressed to the Industry and Regulators Committee in November over small schemes’ handling of LDI.

“It is true that across the board they are more typically badly managed,” he said, suggesting that consolidation vehicles offered a path towards larger schemes.

TPR has issued an interim regime on superfunds. “We believe that should be put on a statutory footing to make them safe,” Counsell said.

He also made the case for professional trustees on scheme boards, but pointed out that there is currently no authorisation process for these trustees. 

“There is a question then about whether or not that should also happen, and therefore there should be an authorisation process around professional trustees,” he said.

Counsell admitted to MPs that TPR had not been collecting systematic data “and in retrospect, maybe we should have been. Certainly going forward, we will be”.

Investment consultants offer standardised advice

The FCA has written to the Work and Pensions Committee in aid of its inquiry, calling on asset managers to stress-test the “operational consequences” of improved liquidity buffers for LDI funds. 

It has also recognised the additional costs that these buffers impose on pension schemes, a concern that was put to the committee by LDI managers in an earlier December hearing.

The FCA underlined the importance of communication during the turbulence. Its wholesale director, Simon Walls, said there were “real challenges in getting information to trustees” during the turmoil. 

“There are discussions around whether having the asset managers co-locating other assets there, so that in emergencies they can access the other assets rather than having to go to the trustees,” Walls said.

Rathi, meanwhile, said that there was “inadequate preparation in a number of the pension funds. There probably wasn’t the financial and operational acumen there to really understand if things went wrong”.

He repeated the FCA’s previous call for investment consultants to be regulated. “We see a lot of leaning on investment consultants in strategy and asset allocation,” he said. 

“One of the reasons we’ve asked for greater regulatory oversight here is a sense that at times they were giving standardised advice,” he continued, with consultants offering “templated advice to a range of different clients rather than really thinking through in depth and in detail what might be the right thing for each pension fund”.

Rathi also noted that some of the custodian banks that were managing the movements of collateral had to move to manual processes as they came under strain, while the bank counterparties also had lessons to learn on their ability to manage risk.

“We need to be planning for failure in an environment […] where we are seeing these one in 100-year events frankly happening every three or four months at the moment,” he said.