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New LDI guidance published by TPR to ensure schemes minimise risk

Ref: PN23-12

Issued: Monday 24 April 2023

New guidance setting out further practical steps trustees should take to manage risks when using leveraged liability driven investments (LDI) has been published today (24 April 2023) by The Pensions Regulator (TPR).

The guidance is the latest support TPR is giving trustees to be resilient in times of challenge and follows the volatility seen last September when the market witnessed widespread selling of gilts by schemes’ LDI arrangements.

Trustees are ultimately responsible for how the assets in their scheme are invested. The guidance stresses the importance of having the right governance and controls in place to reduce risks to their scheme, and to be able to react to events quickly.

TPR expects trustees to only invest in leveraged LDI arrangements which have put in place an appropriately sized buffer. This must include an operational buffer specific to the LDI arrangement to manage day-to-day changes, in addition to the 250 basis points minimum to provide resilience in times of market stress.

Lou Davey, TPR’s interim Director of Regulatory Policy, Analysis and Advice, said: “Many schemes use LDI as a tool to mitigate volatility risks and we continue to monitor the use of this type of investment.

“The unprecedented market volatility seen last September clearly demonstrated there is the need for stronger buffers, more stringent governance and operational processes and more oversight by trustees. Trustees must understand the risks they carry in their investment strategy, and only use leveraged LDI if appropriate. Our guidance provides practical steps to ensure they achieve this vital balance, and we expect trustees to use it.”

TPR’s new guidance sets out specific steps trustees should be taking when investing in LDI, looking at:

  • where LDI fits within a scheme’s investment strategy
  • setting, operating and maintaining a collateral buffer
  • testing for resilience
  • making sure schemes have the right governance and operational processes in place
  • monitoring LDI

Setting the right buffer level is essential so the fund can operate in the normal way even where there are sharp market movements. The right buffer will depend on the composition of the LDI arrangements and the operational processes which surround it.

The guidance urges trustees to make sure there are processes in place for monitoring the resilience of LDI arrangements, taking into account TPR’s guidance on monitoring scheme investments. Trustees should understand what monitoring their advisers or the LDI managers perform routinely and put in place mechanisms to ensure they receive necessary and sufficient information to understand and be able to react to risks.

Trustees are reminded to work with their investment consultants, LDI managers and other advisers to ensure crucial safeguards are in place to protect their members from potential risks.

Notes to editors

  • TPR’s latest guidance follows the Financial Policy Committee's statement on 29 March 2023, and replaces TPR’s October 2022 LDI statement, and its LDI guidance from November 2022.
  • LDI managers will need to have regard to guidance put out by the Financial Conduct Authority, and pooled LDI funds to that put out by the National Competent Authorities (the Central Bank of Ireland and the Commission de Surveillance du Secteur Financier of Luxemburg).
  • The Pensions Regulator is the regulator of work-based pension schemes in the UK. Its statutory objectives are: to protect members’ benefits; to reduce the risk of calls on the Pension Protection Fund (PPF); to promote, and to improve understanding of, the good administration of work-based pension schemes; to maximise employer compliance with automatic enrolment duties; and to minimise any adverse impact on the sustainable growth of an employer (in relation to the exercise of the regulator’s functions under Part 3 of the Pensions Act 2004 only).

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