Pension bosses under fire for ‘overconfident’ account of Truss-triggered LDI crisis
Pension bosses have come under fire from experts today after giving an “overconfident” assessment of their role in tackling the crisis that engulfed the sector in the wake of Liz Truss’s disastrous mini-budget last year.
Several pension funds were nearly sent into meltdown last autumn after Truss’s tax-cutting fiscal plans roiled the gilt market and pushed so-called debt-fuelled liability driven investment strategies (LDIs) to near-breaking point.
Wild swings in the value of government debt triggered a series of margin calls on funds using LDI strategies and forced them into a rapid fire sale of their assets.
The Bank of England was forced to eventually step in with a multi-billion pound gilt buying programme to calm the market.
However, a year on from the crisis, a survey of 68 professional defined benefit pension trustees, appointed to schemes with an average of £1.38bn under management, claimed they had the systems in place to manage the scandal.
Some 78 per cent of trustees said their scheme had the right governance in place to handle the LDI crisis, according to the survey by Charles Stanley Fiduciary Management, while 72 per cent of trustees say they were confident using LDI as a tool to manage risk.
But the results of the survey have triggered backlash from some City experts today.
Rachael Healey, a partner at law firm RPC said while trustees had emerged from the crisis stronger, the findings of the survey signalled some are “looking back with a touch of overconfidence”.
“It’s interesting to see 78 per cent of trustees say their scheme had the right governance in place at the time of the crisis, when the regulator has targeted this as an area of weakness over the past year,” she added.
“Again, it is intriguing to see 82 per cent of trustees responding that they received the right information from their fiduciaries during the crisis, when so many have since changed provider. That doesn’t exactly stack up.”
Tim Middleton, director of policy and external affairs at the Pensions Management Institute, said: “One of the starkest lessons from last year’s LDI crisis is that far too many trustees are overly dependent on their advisers and lack a technical understanding of the investment strategies recommended to them.”
Following the crisis, the Financial Conduct Authority rolled out new protections to try and shore the pension industry up from a similar crisis.
In a series of recommendations this year, the watchdog called for fund liquidity buffers and changes to clients’ “liquidity waterfalls” as well as more rigorous stress tests and contingency plans.
Simeon Willis, chief investment officer at XPS Pensions Group, added that the crisis revealed weaknesses in how managers were running funds and more rigorous stress tests were needed.
“Generally speaking, trustees’ knowledge and skills weren’t the problem during the LDI crisis. The issue was a complex market that just wasn’t ready for the level of price volatility we saw,” he told CityAM
“Whereas before the crisis all LDI managers were seen by trustees as offering broadly the same service, that view has now changed. The crisis demonstrated that great client service is a real differentiator, when your LDI manager picking up the phone meant the difference between retaining or losing your hedge.”