The Pensions Regulator has offered guidance to trustees, setting out action they need to take before the Bank of England’s ends its bond buyback programme at the end of this week.
The statement offers guidance to both DC and DB trustees managing both investment and liquidity risks in the current volatile market conditions.
The statement defended the use of liability-driven investment strategies, which TPR points out have been used in the market for almost 20 years and have successfully protected DB schemes from adverse movements in inflation and interest rate.
The statement sets out the impact of current market conditions on pension schemes, looking at both the challenges for DB and DC schemes. TPR points out that the unprecedented speed and magnitude at which gilt yields increased, following the Government’s mini-budget, have created of liquidity pressure as LDI managers urgently sought further collateral. However it says: “DB schemes were not at risk of ‘collapse’ due to rapid movement in gilt yields, but the key challenges for schemes has been the ability to access liquidity at short notice to maintain their liability hedging position in an environment when long-term interest rates rose rapidly in just a few days.”
It also pointed out that many DB pension scheme have experienced improvement in their funding position during 2022 as a result of long-term gilt yields. It says: “Aggregate deficits have shrunk as, despite falling asset levels, higher bond yields have generally resulted in significantly lower levels of liabilities.”
It says DC schemes do not use leverage in their default strategies, so the collateral call issue affecting DB schemes with LDI investments is not applicable. However, DC members may have experienced a reduction in the value of their savings, particularly if they are invested in gilts, which have fallen in value as yields have risen over 2022.
TPR says it would encourage DB trustees to engage with their investment advisers to gain an accurate position so they can focus and prioritise the key areas of concern.
This would involve of a review of operational processes, liquidity position, liability hedging position, funding and risk position, and how current yield might impact other areas of the scheme.
The TPR statement adds: “We recognise that decisions had to be made at very short notice, with the information available at the time. The actions trustees might wish to consider will depend on whether they currently hedge against interest movements and, if they do, whether this is through a segregated mandate or a pooled fund.
“Feedback we have received from individual schemes and investment consultants suggests that segregated funds have had greater flexibility in the choices they made than some pooled funds.”
TPR says trustees of DC schemes should:
- maintain a long-term perspective when reviewing recent market volatility and performance
- review their investment strategy, and operational factors in executing this strategy
- communicate with savers who are approaching retirement to make them aware of their options and emphasise the importance of seeking financial advice
- encourage savers to seek regulated financial advice or speak to MoneyHelper before making decisions about their pension savings in light of market conditions
- remain vigilant for scams and suspicious transfers
- review processes to ensure they can act at speed where necessary
Commenting on this statement Hymans Robertson head of scheme actuary services Kerry Lindsay says: “Industry focus has understandably been on collateral calls for LDI funds, but rising interest rates also impact the value of member options like transfer values.
“Trustees need to ensure they are reviewing the terms of these options regularly to ensure they remain fit for purpose and we were pleased to see this highlighted by TPR in their statement this morning. We would encourage trustees to work with their advisors to review their options terms as soon as possible in light of recent market movements, and consider how these terms may need to evolve going forward given the current fast changing economic environment.”
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