Liability Driven Investment – TPR Statement: Following the extreme movements in gilt-yields caused by the mini-budget on 23rd September, TPR has now issued a statement on LDI funds and their expectations. TPR highlights that LDI, as an investment tool, has existed for nearly 20 years and has been used to protect schemes from adverse movements in interest rates and inflation. TPR notes that LDI has also played a significant role in helping to manage the affordability of DB schemes for employers and that the increase in long-term gilt yields will have improved funding position for many schemes. TPR encourages trustees to engage with their investment advisers to consider operational processes, liquidity (to meet collateral calls), the scheme’s hedging position, funding, risk, and appropriateness of transfer factors. TPR highlights the potential for scams, due to increased volatility and reminds trustees of the need to be vigilant.
TPR’s statement can be found here: TPR – LDI in current economic climate
Separately, the Work and Pensions Committee will be conducting an inquiry on the ‘lessons to be learned’ from the reported issues that arose for some pension schemes that use LDI. The WPC raised queries with TPR in early October following the extreme market movements and media reports about the difficulties being faced by pension schemes. In its written response, TPR explained that reports of schemes being at risk of collapse were inaccurate and that they risked scaring pension scheme members into taking steps they could later regret.
Mini-budget to Autumn Statement: Kwasi Kwarteng’s significant mini-budget in September announced a number of tax cutting measures, including a reduction in income tax and dividend tax rate. The majority of the measures have since been binned by Chancellor Jeremy Hunt following the removal of Mr Kwarteng. The Chancellor made his Autumn Statement to Parliament on 17th November, which contained the Government’s plan for debt to fall as a share of GDP. Mr Hunt announced that state pensions would be increases by 10.1%, in line with inflation, the 45% rate of tax will apply on earnings over £125,140 and income tax thresholds are frozen for a further two years until 2028. The UK economy is expected to shrink by 1.4% this year. Inflation is predicted to be 7.4% in 2023. The government is to launch a consultation on making reforms to Solvency II, with the aim of unlocking billions of pounds for investment.
DB Funding Code – Second consultation: In a speech to the PLSA, David Fairs of TPR said that the second consultation on the revised DB funding code of practice would be issued before the end of the year. Mr Fairs also commented that TPR was considering the proposals to use duration as a measure of maturity as concerns had been raised due to recent market events.
Pension increases – CPI and RPI: Over the 12 months to September, the Consumer Prices Index rose by 10.1% and the Retail Prices Index rose by 12.6%. Many pension schemes will use the September CPI as a reference point, but most will be capped by scheme rules (5% caps are common). As a cap will be much lower than inflation, trustees may receive requests to consider a discretionary top-up. The statutory minimum increase for deferred pensions uses September inflation as a reference point. There is a cumulative cap over the period of deferment, but as inflation has been so low in recent years, the full CPI increase of 10.1% may come through in full.
New Minister for Pensions: There have been a number of ministerial appointments in recent weeks under Liz Truss’s short-lived period as Prime Minister and Rishi Sunak’s subsequent elevation to the top job. Laura Trott, the MP for Sevenoaks, has now been confirmed as the minister for pensions, replacing Alex Burghart who was in the post for 38 days. The previous long-serving pensions minister, Guy Opperman, is now minister of state for employment. Mel Stride has been appointed as the Secretary of State for Work and Pensions.