It has been nearly a year since then Prime Minister Liz Truss’ ‘mini-Budget’ caused a collapse in gilt prices which wiped GBP500 million wiped from the UK’s defined benefit (DB) pension schemes and caused a crisis in confidence in the widespread use of liability-driven investment (LDI) strategies.
The major cause for alarm was the reliance on high levels of borrowing encouraged by some investment consultants that left trustees exposed when gilt yields started to rise.
Speaking at a Commons Work and Pensions Select Committee hearing into the debacle last November, John Ralfe, an independent consultant, described pension advisers, as the “villains in the piece” blaming them for allowing excessive hidden leverage which “is always a bad thing”.
The Committee has since demanded that the Department for Work and Pensions and the Pensions Regulator ensure that “DB pension scheme investments must not be allowed to jeopardise the UK economy again”, and that reforms be introduced.
Yet according to research from Charles Stanley Fiduciary Management, the UK’s DB pension trustees’ recollections of the LDI crisis reflect far more confidence in their governance than that shown by the government.
More than eight out of 10 (82 per cent) of trustees looking after a combined GBP1.38 billion in assets, believe they had the “knowledge and skills they needed to handle the crisis”, while more than three-quarters (78 per cent) say their scheme “had the right governance in place” to respond to the fall in gilt prices.
Further, 72 per cent say they are “confident using liability-driven investments (LDI) as a tool to manage risk”.
So confident in fact that 54 percent of trustees say they are now more inclined towards hedging scheme liabilities; significantly up from 40 per cent in 2022.
But trustees’ confidence in their consultants and managers has been affected by the crisis, according to the Charles Stanley research, with a number of schemes sacking their providers.
More than half (55 per cent) of trustees have already changed their LDI manager because of the crisis, while 42 per cent changed their fiduciary manager; a third replaced their investment consultant; and 30 per cent ditched their non-LDI investment Managers.
Bob Campion, Senior Portfolio Manager at Charles Stanley Fiduciary Management, says: “Last autumn was the ultimate stress test for DB pension schemes, particularly those with advanced LDI hedging strategies. The good news is that the majority of pension schemes were able to navigate the choppy waters, but the few examples where there have been casualties has made professional trustees re-consider their consultants and fiduciary managers.”
He adds: “They now recognise that client service is a key component of investment management, particularly when times are tough.”
In terms of how they will manage LDI strategies in the future, almost three-quarters (72 per cent) of trustees say they are more likely to use adopt fiduciary management for their schemes.
Campion says: “During any period of challenge, the professionalism and resources of a fiduciary managers can provide a major benefit to pension schemes. Their ability to monitor market conditions and react swiftly, even when the market activity is highly unusual or unexpected, can be a vital benefit to trustees.”
Irrespective of the arrangements in place for managing LDI strategies, however, the fallout from the 2022 LDI crisis will be felt for some time, and trustees can expect considerable regulatory scrutiny in the future.