The Institute and Faculty of Actuaries (IFoA) regulates its members to make sure that there is public confidence in its profession.
The IFoA is incorporated by Royal Charter under which it has the role of regulating the actuarial profession, in the public interest.
The IFoA’s Regulatory Policy Statement sets out its approach to that regulatory role.
What this means is that advice given to pension schemes over the implementation and operation of LDI is a regulated activity but not one that the FCA needs to be directly involved with.
The IFoA believes that the recent volatility in the gilt markets has not materially impacted the ability of defined benefit pension schemes to meet their obligations to members. The short-term challenge was around operations and liquidity for collateral rather than any risk to members’ pensions. In fact, the rising interest rates mean that many schemes are now better funded and closer to being able to secure benefits with an insurance company.
The Liability Driven Investment (LDI) approach has come under intense scrutiny as a result of recent events. LDI was developed as an attempt to balance long-term obligations to provide pensions with a need to protect short-term funding so that pension trustees can meet their legal obligation to ensure stability of the scheme. Without LDI strategies, schemes would be exposed to the very substantial risk of liabilities increasing much faster than assets in times of falling interest rates, requiring significant additional contributions from sponsors or resulting in members’ benefits potentially having to be cut back in case of sponsor insolvency.
Finding the right balance to manage risk within a pension scheme will always be a challenging task. However, we believe the market turbulence can be a catalyst for open discussion within the industry about whether adjustments or improvements can be made to schemes’ approaches to their risk management and investment strategies, while ensuring public confidence and trust is maintained for consumers. We expect these discussions to be primarily in relation to governance and amount of leverage used rather than necessarily moving away from LDI.
At the IFoA, our Regulatory Board quickly and formally considered whether a Risk Alert on LDIs should be issued, and concluded not at this time although it will continue to keep this question under review. Given its systemic nature, we are also asking the Joint Forum on Actuarial Regulation (JFAR) to consider the subject; the JFAR group comprises many of the regulators who have an interest in or are impacted by recent events in this area.