Today, the Work and Pensions Committee released its report on Defined Benefit (DB) pension schemes with liability driven investments. LCP was pleased to be able to give evidence to the Committee and now see our contributions in the final report.

Steve Hodder, LCP Partner, said:

“We saw the events of September/October last year primarily caused by systemic issues. We are glad that the Committee’s report agrees with this assessment.

We are pleased that the Committee has given a fair summary of the logic behind schemes using LDI. The vast majority of our clients have continued to use LDI as a core risk management tool. This helps stabilise the assessed cost of the value of their pension promises under generally accepted approaches.

We are glad the Committee has not been drawn into some of the more hysterical commentary from last year. In particular, suggestions that the concept of leverage itself is inappropriate. Leverage, used sensibly, is a cornerstone of our economy: company balance sheets, individual home ownership and financial risk management. The fault lines that emerged last year were due to political events catalysing systemic volatility that was far more severe than reasonable market participants thought possible.

We are glad the Committee has focussed on systemic issues rather than the “blame game” that individual investors did not consider their impact on the multi-trillion gilt market. It seems to us very challenging to draw a conclusion that each of thousands of investors should have carried out a systemic risk assessment themselves, especially given the data required to do so was not centrally collected. This, to us, was akin to blaming the person at the back of the cashpoint queue for a bank run.”

“The recommendation to further consider DB consolidation is interesting, given the events of last year highlighted how a concentration of actions can cause market issues. For example, based on our experience, consolidating schemes into fiduciary management did not result in better outcomes.

“From my own perspective, I welcome the calls to reconsider the new DB funding regime, which creates tighter constraints around how Schemes are expected to operate. This is likely to herd schemes into even more similar gilt-based investment strategies. We saw last year the potential problems this could cause. In my view, a better use of time would be to focus on incentivising behaviours for better investing these £ 1trn+ assets for the benefit of the wider UK economy whilst appropriately safeguarding members’ benefits and have separately provided our views on this to the WPC.”