UK regulators failed to anticipate the impact of last September’s mini budget on pensions, a parliamentary investigation has concluded.
Pension schemes suffered multi-billion-pound losses after they were forced to sell assets to stop liability-driven investments (LDI) from imploding after investors rejected former chancellor Kwasi Kwarteng’s economic strategy. September’s sharp rise in interest forced pension funds to sell assets, often at significant losses, to meet the liquidity calls required by the fall in leveraged LDI values.
The House of Lords Industry and Regulators Committee urged ministers to review the requirement for retirement income promises to be recognised in company annual accounts. This has forced pension schemes to pursue LDI strategies relying on borrowed money, the committee said.
The inquiry found that some pension scheme trustees were not aware of the potential implications of their LDI strategies, and their decision-making struggled to match the pace of markets. This led them to depend on investment consultants, whose advice to schemes is unregulated and may not be comprehensive over the whole portfolio or cover operational requirements.
“We are calling for regulators to introduce greater control and oversight of the use of borrowing in LDI strategies and for the government to assess whether the UK’s accounting standards are appropriate for the long-term investment strategies that are expected of pension schemes,” said committee chair Lord Hollick.