UK's TPR shares review into impact of 2022 LDI episode

The Pensions Regulator (TPR) in the UK has provided an update on the work undertaken following the liability-driven investment (LDI) crisis in autumn 2022, suggesting that improvements in defined benefit (DB) funding levels would have occurred even without the LDI episode.

As reported by our sister publication Pensions Age, the Work and Pensions Committee (WPC) previously called on TPR to share a review on the LDI episode and explain how it plans to monitor whether LDI resilience is being maintained, by the end of October 2023.

TPR has now shared its full report on the impact of the LDI episode in response to this recommendation, looking at how the value of the DB pensions landscape changed and the role of LDI strategies in funding changes.

This revealed that the value of the assets fell by of around £425bn over 2022, equivalent to a 24 per cent fall in the overall value of scheme assets, primarily due to the loss in value of gilts, corporate bonds and property.

However, TPR's analysis showed that the value of liabilities fell by around £575bn (33 per cent) over the same period, primarily due to the increase in gilt yields, which itself is a function of the material fall in the value of gilts over 2022.

Overall, TPR also found that scheme funding on a technical provisions basis improved "significantly" over 2022, with the aggregate funding level increasing from103 per cent as at 31 December 2021 to 118 per cent as at 31 December 2022.

This led to a material change in the number of schemes estimated to be in surplus on a technical provisions basis, from an estimated 52 per cent of the universe (by number of schemes) as at 31 December 2021 to an estimated 79 per cent of the universe as at 31 December 2022.

In addition to this, TPR found that there has been an improvement in funding levels on both a buyout and low dependency basis.

"The LDI episode following the September 2022 mini-Budget was a short-term phenomenon observed within the wider economic landscape of increasing gilt yields and increased global interest rates seen throughout 2022," the report stated.

"As such, even without the LDI episode, our expectations are that much of the improvement of funding seen across the DB universe would likely have occurred over the timeframe covered in this analysis in any event.

"In other words, the outcome for gilt yields by the end of 2022 (and thereafter) it is supposed would have been broadly the same, irrespective of the LDI episode."

However, in a letter to WPC shared alongside the report, TPR confirmed that, whilst unprecedented, the market turmoil in September 2022 has raised concerns related to the impact of DB investment strategies, in particular the use of leveraged LDI, on financial stability.

Given this, the regulator confirmed that work continues to be undertaken in this area, with TPR working more closely with other regulators to recognise the role pensions play across borders and the complex financial ecosystem.

The regulator also highlighted the work that has been done to improve its data picture and bolster its market-facing expertise to anticipate and mitigate risks on a system-wide level.

“We have in place a data strategy to provide us with a more robust picture of the resilience of both pooled and segregated LDI funds, the liquidity levels of DB schemes and the governance and operations of DB schemes enabling them to respond quickly to a similar situation in the future,” TPR chief executive, Nausicaa Delfas, stated.

“This data will allow us to better understand individual scheme situations and schemes' ability to deal with any future gilt market volatility. We will also look to build this into our future modelling where possible.”

In addition to this, Delfas revealed that TPR has doubled its number of investment consultants, and is also seeking access to senior market participants to better gather market intelligence and understand potential wider market risk that could impact pension investments.

She also suggested that the anticipated introduction of the DB funding and investment (FIS) regulations in early 2024, will result in TPR receiving richer scheme valuation data from trustees.

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