The Liability Driven Investment crisis of September last year saw gilt yields rise sharply following the government’s mini-budget.

This resulted in a significant fall in the value of leveraged LDI funds which in turn detrimentally impacted many pension schemes that used these investments. In the aftermath of the crisis, the Work and Pensions Committee launched an inquiry on the lessons to be learned.

In response, earlier this month the Industry and Regulators Committee of the House of Lords made a number of fairly radical recommendations for reform.

Some changes would see a comprehensive tightening of current investment regulations (including urgently bringing investment consultants within the FCA’s regulatory perimeter) while others would bring about a significant refocus of the current funding regime.

However, perhaps the most striking recommendations the Committee makes are in respect of the Pensions Regulator (TPR), following a rather damning assessment of the role it played in the crisis:

“It appears that TPR was so focused on individual scheme finances and protecting sponsoring employers that it underestimated the potential systemic risks its actions were causing for the wider financial system.”

The Committee recommends:

• that TPR is given a statutory duty or ministerial direction to consider the impact of the pensions sector on the wider financial system;
• that TPR reports to the Bank of England’s Financial Policy Committee (FPC) on potential systemic risks;
• that TPR understands that trustees’ responsibility is the viability of the pension scheme itself, rather than that of the sponsoring company;
• that TPR follows up more actively on risks identified by the FPC in the future;
• that the FPC is given the power to direct action by TPR if it fails to take sufficient action to address risks.

We are yet to see which reforms, if any, will be implemented as a result of the LDI crisis. Certainly, if the Committee’s recommendations regarding TPR are followed, we could see a significant reshaping of its focus, authority and independence. From a pension scheme trustee’s perspective, the other recommendations could also bring about significant changes for scheme investments.

But what of the many pension schemes with LDI investments that were negatively impacted by the crisis?

Many trustees and their advisers are now wrestling with significant losses and difficult questions.

• what, if anything, can be done to mitigate or recover the losses suffered?
• can anyone be held legally responsible, or is this just force majeure - an Act of (a pensions-focused) God?
• given the often significant sums involved, can trustees simply just chalk this up as a bad experience, or do they have a duty to attempt recovery of losses suffered?

Trustees should take legal advice where necessary to identify what can and should be done. Please let us know if your board would like any advice on dealing with the aftermath of the LDI crisis.

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