TPR issues guidance after market volatility

In October, in the aftermath of the market’s sharp slump, TPR set out its expectations for trustees of defined benefit (DB) and defined contribution (DC) schemes and their advisers. It acknowledged that while most DB schemes would see an improved funding position, “these rises in yields put significant pressure on leveraged liability-driven investment (LDI) funds and resulted in additional capital calls on DB schemes”.

Now it has issued more guidance to DB scheme trustees and advisers with recommendations about such leveraged funds that it says aim to secure and maintain “an appropriate level of resilience” that could handle a swift rise in bond yields and improve operational governance.

Among the actions TPR wants to see trustees carrying out are basic housekeeping, such as confirming that authorised signatories are up to date so that prompt action can be taken, when necessary. To ensure that governance is sufficiently “robust”, carrying out a stress of the non-leveraged LDI asset allocation using a yield shock established by several National Competent Authorities is advised, and a stress of the leveraged LDI mandate under the same conditions.

Market movement impact

This latest set of recommendations and expectations backs up what the regulator said previously that trustees should consider its guidance “relative to their current position and how significantly they have been impacted by market movements”. For DB schemes, it proposed a review of operational processes in order for trustees to be able to act quickly when needed and to ensure “robust procedures” were in place to respond to changing conditions, making decisions and implementing them.

It also called on trustees to review their liquidity position as it was likely that the “balance of liquid to illiquid investments” would have changed within the scheme. “Schemes may have had to realise some liquid investments to meet collateral calls, but some illiquid investments may have been less susceptible to recent market movements. Trustees should review previous cash management and disinvestment plans and revise them, if necessary,” the regulator said.

Among its other expectations, TPR also suggested DB scheme trustees should consider the extent of their liability hedging position as part of the risk profile review, review funding and risk positions and consider how current yields affected other areas of the scheme; for example, higher yields will have had an impact on transfer values.

Long-term saving vehicles

For DC schemes, TPR noted that pensions were long-term saving vehicles, and it was important that savers did not make “hasty decisions” based on short-term volatility. It said as well as rising interest rates, DC savers were also subject to the impact of high inflation, particularly where they had high allocations to cash, for example as part of a lifestyle strategy as they approach retirement. It urged trustees to maintain a long-term perspective and communicate with savers to make them aware of their options, including guidance from Pension Wise or seeking financial advice.

Our view

MHM has seen that with long-term interest rates (gilt yields) now hovering around four per cent (at time of writing) compared to less than one per cent a year ago, a number of schemes are considering entering into buy-in/buy-out agreements with insurance companies. This is an opportunity to further de-risk and look at offloading some or all of their liabilities to an insurance company at a much more affordable price than they could have dreamed of in 2021.

While much of the interest rate increase came in during the first 7-8 months of this year, driven by the war in Ukraine and inflationary pressures, the mini budget pushed hikes into overdrive when rates tipped five per cent for a while before the BoE stepped in to stabilise the markets a little. Despite the brief period of excitement, the going concern funding level for schemes with full hedging in place would have been largely unaffected, assuming they were able to meet collateral calls to maintain their hedge position. Most will, however, have seen an improvement in the solvency funding level and may now want to revisit their medium and longer-term objectives for the scheme.

If you would like to discuss any of the issues covered in this article, contact us on 01423 229029 or email catherine@mhmtrustees.co.uk.