Current Issues October 2022

Government Bond Yields – BoE takes action:   It is not often that DB schemes make the headlines, but that is what happened following the significant increases in gilt-yields following the mini-budget of 23rd September. Whereas changes in gilt-yields usually take months to unfold, the yields on long-dated gilts were seeing rises of around 1% or more in the space of a few hours. The fact that many schemes had hedged their interest rate risk via leveraged LDI funds, led to collateral calls at short notice, causing difficulties for some schemes, leading the Bank of England to announce that it would carry out a temporary purchase of gilts, up to 14th October,  to restore orderly market conditions. The yield on 30-year gilts had risen to over 5% just before the BoEs announcement. Yields have now fallen back to around the levels they were at prior to the mini-budget, which are still relatively high compared to recent years.   

The rise in gilt-yields is likely to have improved the funding position of many schemes that were not fully hedged against interest rate risk, meaning there may be an opportunity to ‘lock-in’ some gains. Trustees may also be thinking about the impact on covenant, transfer values and scheme factors. We have written a special newsletter on this:  Atkin – Consequences of mini-budget

Mergers & Acquisitions – TPRs expectations for Directors:  TPR has published a blog in which it notes it is paying attention to M&As involving companies with a DB scheme. TPR will not hesitate to become engaged in transactions where it is concerned that there may be a risk to pension savers. Incoming and outgoing corporate management teams must support the Trustees to implement a robust funding plan, underpinned by cash or tangible security. TPR stresses that pension schemes should be recognised as primary creditors in any restructuring, acquisition or financing deal and be treated accordingly, rather than as an ‘after thought.’  Trustees should be given access to the bidder and their advisers at the earliest opportunity. The blog can be found here:  TPR Blog – M&A

PPF Levy  – Consultation on 2023/24 levy rules:   The PPF expects to charge a much lower levy in future and is reviewing the levy methodology so that it is more flexible and simpler. Consultation has begun on the proposals. For the next levy year, the PPF is proposing to set a levy estimate of £200m, which is significantly lower than the previous year. It also proposes to reduce the sensitivity of the levy to changes in insolvency risk so that increases between bands will not be as great. The PPF will also reduce the Levy Scaling Factory by 23% and the Levy Multiplier by 10%. Therefore, most schemes and their sponsors should see a welcome decrease in the levy.

TPR Scheme Return – Changes in information required:  TPR has announced changes to the information schemes need to provide as part of the asset breakdown in Scheme Returns. TPR has removed insurance funds, hedge funds and commodities as asset categories and has added Diversified Growth Funds and Absolute Return Funds. Schemes will be put into tiers, depending upon total S179 liabilities, with bigger schemes having to provide more information on assets. Tier 1 will apply to schemes with liabilities of up to £30million, Tier 2 will apply to schemes with liabilities of between £30million and £1.5billion, and Tier 3 will be for schemes with liabilities of £1.5billion or more. Schemes will have the option to ‘trade up’ and provide more information on their asset breakdown if they wish.

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