New DB funding rules could ‘increase systemic risks’
As part of the Work and Pensions Committee’s own call for evidence, respondents have been asked whether TPR has “taken the right approach to regulating the use of LDI and had the right monitoring arrangements”.
In its submission – dated November 15 – the Association of Consulting Actuaries argued that “LDI has overall significantly benefited DB pension schemes” and “remains fit for purpose”. It predicted changes to the operation of LDI, such as standard minimum levels of collateral.
While TPR has come under fire from some quarters of the pensions industry, the ACA said that the watchdog “has historically taken an appropriate and proportionate [approach] to regulating the use of LDI and investment in general for individual schemes”.
“However, systemic risk is a separate point, including whether the cumulative effects of hedging activities from individual schemes were being sufficiently closely monitored by wider regulators,” it continued.
The ACA stated its concerns regarding government proposals over the funding of DB schemes, which would see them needing to be funded in such a way that they are in a state of “low dependency” on their sponsoring employer by the time they are significantly mature.
The industry body warned that a typical way for schemes to meet this proposal would be the “greater use of LDI approaches”.
“This standardisation therefore has potential unintended consequences, such as increasing systemic risks in future by encouraging all DB schemes to invest in very similar ways,” it said.
The ACA also cautioned that the proposals were “insufficiently flexible” and introduce an “industry-standard approach”.
“We believe the opportunity should now be taken to reflect on these dynamics, to ensure that investment decisions do not contribute to an increase in systemic risks when viewed across the whole industry,” it added.
Alex Janiaud is the deputy editor of Pensions Expert, FTAdviser's sister publication
