The LDI crisis may be abating but the inquest has just begun

Speaking to consultants at the Pension Age conference yesterday, it was clear that some senior pension experts think the matter can be dropped. This is in contrast to what is happening in our seat of Government.

This afternoon Lord Daniel Moylan will ask ask His Majesty’s Government what assessment they have made of (1) the extent of Liability Driven Investment strategies in the management of Defined Benefit pension funds, and (2) the consequences that may arise for (a) His Majesty’s Government’s ability to issue new gilts, and (b) the management of inflation.

Earlier in the day, Con Keating and Iain Clacher will be providing oral evidence at a private meeting of the Lords “Industry and Regulation Committee”.

Meanwhile the Work and Pensions Select Committee and the Treasury Select Committee are both collecting evidence as to  “what happened and what happens next”.

If we think that the complete U-turn in government policy , coupled with a slightly less hawkish view on global pressure on interest rates will allow gilt yields to stabilise below 4%, then they will have time to reorganise their strategies and set new plans for their client’s futures. Disregard the spot surveys on Pensions Buzz and a recent LCP call, there is almost certainly going to be general deleveraging

To suppose that the LDI crisis is behind us , is to fall into the same complacency as brought the crisis upon us.

And one of the first casualties looks likely to be the DWP’s Draft DB Funding Regulations.

It should be noted that there is general consensus amongst the actuarial consultancies that the DWP’s DB funding regulations need (to use WTW’s phrase) return to the drawing board, but this note from First Actuarial goes further , arguing that [DB Schemes’] “recent experiences indicate that existing approaches may need to be materially altered for a new economic environment“.

Here’s the note in full


First Actuarial’s Hilary Salt


First Actuarial has asked the Department for Work and Pensions (DWP) to hit pause on the new Defined Benefit (DB) pension scheme funding rules. This would allow for a timely re-assessment of the draft regulations in light of recent financial market developments. The firm has made this request as part of its response to consultation on the regulations.

The draft regulations are designed to enshrine in law a new approach to the funding and investment strategies of DB schemes, particularly maturing ones.

In its previous assessment of existing scheme-specific funding requirements, Government emphasised that maturing schemes needed to think more clearly about their ultimate objective and take a joined-up approach to funding and investment issues.

However, Government concluded that because nothing was fundamentally broken, root and branch change would not be needed. In our view, the draft regulations do not reflect the spirit of incremental change.

We believe that hitting pause on the DB funding rules at this point makes sense as there is a general feeling that a new investment paradigm is emerging. In this context, introducing an inflexible ‘one size fits all’ approach to DB funding could have unintended consequences.

Systemic risk from LDI

Gilt yields have risen significantly in 2022. While this means most DB schemes will see an improved funding position, these rises have put significant pressure on leveraged liability-driven investment (LDI) funds, and have resulted in additional capital calls on DB schemes.

It has been clear since the last week of September that the combined effect of multiple schemes hedging against interest rate rises by purchasing LDI contracts has the potential to create large-scale systemic risk.

The pressure to de-leverage LDI solutions by providing additional collateral means many schemes are re-examining their strategy. Their recent experiences indicate that existing approaches may need to be materially altered for a new economic environment.

Higher yields raise questions over ‘significant maturity’

The draft regulation states that a scheme reaches significant maturity on the date it reaches a specified duration of liabilities. The problem is that the duration depends on the discount rate used and will change with fluctuations in gilt yields. Durations have been tumbling over the past few months and the impact of defining maturity on the basis of such a yield-sensitive measure is uncertain.

Making separate provision for open schemes

In our consultation response to the DWP, we also argued for open DB schemes to be treated differently. With the flow of new entrants in open schemes, the duration of liabilities generally doesn’t decrease over time.

The consultation document does recognise the distinctive needs of open schemes. In particular, it states that open schemes that are not maturing and have adequate ongoing sponsor support should not have to undertake inappropriate de-risking of their investment strategy. But there are no specific carve-outs for open schemes in the regulations and we worry that this leaves a gap for regulatory over-reach.

We aren’t confident that the regulations will allow open schemes to continue to invest productively and provide adequate and reliable pensions to scheme members at an affordable cost to employers. It’s also the case that with a new Prime Minister and Cabinet in place, the position of the Government on economic growth is unclear at the time of writing.

A pause would provide useful opportunity to clarify Government’s agenda on growth and avoid the possibility of regulatory mis-interpretation.

Why pausing the new DB funding rules makes sense

We believe that the case for pausing the draft funding and investment regulations at this stage is a compelling one. This would allow for a thorough consideration of recent political and market developments alongside responses to the consultation. We will then be able to move forward on a more solid basis.




About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to The LDI crisis may be abating but the inquest has just begun

  1. John Mather says:

    There is a tendency to look at problems as if there a few dimensions to the issue. Often, almost always, it is the combination of many levered that determines outcomes. Many of these factors have been present and growing for decades.

    A fly on the wall of 11 Downing Street this week would observe the balances being discussed between orthodox options (enhancing growth, fiscal consolidation, privatization, and wealth taxation) and heterodox options (inflation, financial repression, and debt default and restructuring)

    The challenge is to take the adversity they produce and to turn it to advantage.

  2. John Mather says:

    Does anyone use good dictation software that they could recommend?

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