How LDI turned small DB schemes into “vulnerable customers”.


This blog provides new information to those who are under the impression that leveraged LDI was only used by large pension schemes. It also looks at the guidance that TPR is issuing to all schemes using LDI – showing just how difficult it is for small schemes to manage its hedges.

Industry sources have researched 500 small DB schemes for the use of LDI (typically using pooled funds).

Speaking to the House of Lords Economic Affairs Committee, Andrew Bailey noted that there are around 175 LDI pooled funds operating in the UK market, in which 1,800 pension schemes invest.

The result is clear, at least half the schemes researched used pooled funds with more than a third of scheme assets allocated to these funds.

You cannot generalise about the trustees’ behaviour, or the advice given to trustees by their investment consultants. As one close to the data told me

“Different consultants have different attitudes to LDI in this space. One hardly uses it at all, another uses it for most schemes. One uses it somewhat, but when it does use it (LDI) allocations are high”

The sample findings point to a high concentration of assets in LDI pooled funds. The Pension Regulator’s Purple Book is published today (1st December). You can register for the publication launch Purple Book 2022 | Pension Protection Fund (

From the Purple Book’s data we will be able to see the numbers of schemes falling into the AUM brackets and this will in turn provide us with an understanding of how many pension schemes may have been at risk of losing their hedge over the weeks following the mini-budget.

To say that small schemes do not use LDI is clearly nonsense.

Coincidentally, the Pensions Regulator has today published guidance to small schemes on how they should use pooled funds going forward.

This is a little late in the day but it would be better late than never if TPR accepted that this guidance was as relevant at any time over the past 20 years as it is today. TPR warns

 If a scheme is not able to hold sufficient liquidity, or is unwilling to commit to that level of liquidity, they should consider their level of hedging with their advisers to ensure they have the right balance of funding, hedging and liquidity. For schemes that decide to adopt an investment strategy with a reduced hedge, this should be done in a predetermined manner by the trustee, having taken appropriate advice.

So what is sufficient and who defines it? Trustees are left to make these decisions with the help of their consultants, but we are no clearer knowing when investing in an LDI pooled fund is appropriate and how much leverage schemes should apply.

In short, the Pension Regulator’s guidance is not taking the argument forwards.  Most small schemes are being told that they shouldn’t be caught naked when next the tide goes out.

TPR is putting themselves on the right side of the debate (for them) but this guidance does little more than tell schemes “it’s up to you”.

A bewildering product

Though there are 1500 LDI pooled funds into which you can invest, there are a relatively small number of providers. L&G for instance offer a large number of “buckets” into which your money can be thrown.

With leverage varying from 6.7 to 1.7 times the investment (depending on the bucket fund chosen)

The maintenance of the right governance and procedures for managing LDI through future turbulence looks a tall order for small DB schemes.

Having spoken with a former BlackRock LDI manager and now head of LDI at the PPF, it is clear that even with that level of in-house expertise the PPF found it hard to wind down its LDI program over 2022.

Is it any wonder that when the collateral calls came, small schemes were unable to manage their LDI positions.

They were sitting ducks and the most vulnerable of customers

As Andrew Bailey told the House of Lords Committee

“[Pooled funds] had to go to the parent funds and get the trustees to agree to transfer the liquidity, and in the time available, which was short, and on the scale needed the very clear message we were getting  was that they were not set up to do that.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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