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School of Law

LDI Strategies: The Pensions Regulator on Trial

Date: 6 December 2022

The London Financial Regulation Seminar is an inter-collegiate and inter-disciplinary group of experts led by CCLS and our Institute of Banking and Finance under the leadership of Professor Rosa M. Lastra and Daniele D’Alvia.

Professor Ian Clacher and Dr Con Keating discussed the role of the UK Pensions Regulator in the liability-driven investment (LDI) crisis. Professor Lastra chaired the event and Professor Bernard Casey was the discussant.

Professor Ian Clacher is Professor of Pensions & Finance and Director of the Centre for Financial Technology and Innovation. He is an expert on pensions and retirement savings, most notably on retirement decision-making, pension fund investment, and sustainable pension systems. He is also a core member of the £10m UK Centre for Greening Finance and Investment where he leads the pensions and asset management flagship and the development of an innovation hub in Leeds. A central feature of Professor Clacher’s research is its real-world relevance, and it has been used to advise a range of businesses/policy makers, and he is often cited in the press on issues of pensions, finance, and economics.

Dr Con Keating is a retired financial analyst. He is currently the chair of the Bond Commission of the European Federation of Financial Analysts Societies (EFFAS) having previously chaired for seven years the EFFAS committee on Methods and Measures. His professional career began as a merchant banker and ended as the head of risk management for a major international insurance group. In the interim, he headed bond trading at First Boston/Credit Suisse First Boston and Bankers Trust and was a portfolio manager for both equities, bonds and derivatives. In this latter role, his clients included the NATO Provident Fund, Signal – the US longshoremens’ life, pension and healthcare funds – Government of Singapore, Kuwait, and Taiwan.

Professor Bernard Casey retired as an academic in 2017. He worked at various universities and research institutes in the UK and Germany and have been a guest at universities across countries in Europe, Japan, China, and Australia. In addition, he spent time as a senior economist at the OECD and was a frequent consultant to the European Commission. He has specialised in the economic implications of societal ageing. In this respect, he has written on labour markets for older persons, public and private pensions, and the financing care for the frail elderly. This has led him into the field of social and “responsible” investment.

Over the past decade, pension funds have turned to the so called liability-driven investment (LDI) strategies to help match their liabilities with their assets, often using derivatives. Since 2003, LDI has become widely used by the UK’s 5,200 defined-benefit plans. The LDI strategy is at the centre of the pension industry turmoil in October 2022 that prompted the Bank of England (BoE) intervention as thousands of schemes teetered on the edge of default. Indeed, there is a vulnerability of LDI that was exposed as gilt (30-year British bond) yields rose at an unprecedent pace following the chancellor Kwasi Kwarteng’s ‘mini’ budget. Thousands of pension plans struggled to meet emergency cash calls on their LDI contracts.

However, Lord Wolfson, chief executive of retail group Next, had warned the BoE about LDI, describing the strategy as a “time-bomb waiting to go off”. Professor Clacher and Dr. Keating’s contention is similar, and they will further illustrate us how the declines in gilt prices in response to the mini budget were relatively mild, and that the risk of LDI spiralling out of control was not an illusion. We were already into that process by the 26 September 2022. By contrast, the Pensions Regulator appears to consider itself victim of the assault on the gilt market, not its perpetrator.

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