The Pensions Regulator (TPR) has defended itself against accusations of having not taken "stronger action" to prevent the recent turmoil experienced by some defined benefit (DB) schemes that employ liability-driven investment (LDI) strategies.

In response to a letter from the chair of the Work and Pensions Committee, Stephen Timms, TPR's chief executive Charles Counsell said that the watchdog has "consistently alerted trustees to liquidity risk".

Counsell also highlighted the TPR's call — back in May in its Annual Funding Statement — on trustees to consider their liquidity plans and take necessary precautions in light if rising interest rates.

"In our communications to trustees, we have consistently called on trustees to ensure they have the liquidity plans in place in the event of any significant downside risk," writes Counsell in his letter to Timms.

"In our supervision work, and when we have cause to engage with a scheme, we consider a scheme’s investment approach and within this, how the trustees are managing risk."

Following a negative financial market reaction to the government's mini budget on 23 September, yields on UK government bond yields spiked, creating an immediate liquidity crisis for DB funds that rely on LDI strategies.

The Bank of England stepped in on 28 September to purchase long-date gilts in order, partly, to ease the pressure on DB schemes, and has since extended this to index-linked gilts.

Counsell appeared to claim in his letter that TPR did not pressure the Bank of England to step in.

"As the gilt market instability developed, we established regular contact with the Bank of England and other regulators about what action could be taken to mitigate risks from rapid changes in the gilt market," he wrote. "Fundamentally, it was the Bank’s decision to intervene in the way it did."

TPR acknowledged that without intervention from the Bank, some schemes would have faced much larger collateral calls and would have been forced to possibly seek support from their sponsoring employers to protect their LDI investments.

However, Counsell condemned mainstream media coverage of the crisis, saying that it was "not the case" that pension schemes were at risk of "collapse" due to the change in gilt prices.

"Contrary to this," he wrote, "the longer-term funding position of the majority of DB schemes has improved as a result of the increase in gilt yields, with the value of scheme liabilities falling by up to 50 per cent, depending on the scheme’s circumstances."

"The nature of the problem facing DB schemes that adopted (LDI) at the end of September was primarily an issue about short-term pressure on liquidity (rather than a funding problem)," he explained.

"LDI provides downside protection in the event of falling yields, it does require collateral to be posted when yields rise, and this therefore requires planning on the part of trustees to ensure that they have liquidity available to match these calls.

The risk of long-term gilt yields rising and the consequent need to post capital was well understood by the industry and dealt with through liquidity plans.

"It is the speed and the magnitude at which gilt yields increased at the end of September that caused the squeeze on liquidity."

He said that LDI is an investment tool that has existed in the market for nearly 20 years and served schemes well, protecting them from adverse movements in interest rates and inflation and reducing the impact on funding levels when interest rates have fallen.

In terms of helping schemes with LDI plans to navigate future potential gilt market volatility, TPR will now be issuing new regulatory guidance to trustees outlining its expectations regarding LDI.

It will also "build" on its understanding of the LDI landscape by conducting new analysis of how schemes use LDI strategies.

"It is clear the rapid movement in gilt yields has been extreme and unexpected," added Counsell.

"However, we always learn lessons from situations such as this — as we did following the pandemic — to update and improve our approaches. As well as the lessons we will learn, there will undoubtedly be lessons for the pensions industry.

"This may include governance improvements so schemes can react more quickly and make decisions in real time."

TPR estimated that 60 per cent of UK DB schemes have LDI plans in place, with total hedging by those LDI plans covering some £1.4trn of liabilities for DB funds.


This article first appeared on our sister title, Pensions Age.

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