最近金边债券市场动荡的原因和后果：对工作和养老金委员会要求提供证据的回应

A Submission in Response to the Work and PensionsCommittee’s Call for Evidence The Causes And Consequences OfThe Recent Turmoil In Gilt Markets: A SubmissionInResponseToTheWorkAndPensions Committee’sCallForEvidence November 2022 Authors Professor Iain Clacher & Dr Con Keating EditorSimon Mills Cover image: Katie Moumwww.katiemoum.com Contents Introduction............................................................................................................................................1Part I: Overview......................................................................................................................................1Part II: Setting The Scene For Our Response To The Call For Evidence................................................2The Advent Of Liability Driven Investment And Leveraged Liability Driven Investment................3The Growth Of Leveraged LDI............................................................................................................6Changing Asset Allocation and QE Impacts.....................................................................................10The Market Disruption.....................................................................................................................14Repo and Derivatives.......................................................................................................................15Some Legal Issues.............................................................................................................................16Part III: Answers To The Questions In The Call For Evidence..............................................................19The Impact On DB Schemes Of The Rise In Gilt Yields In Late September And Early October......20The Impact On Pension Savers In DB And Defined Contribution Pension Arrangements.............21Whether The Pensions Regulator Has Taken The Right Approach To Regulating The Use Of LDIAnd Had The Right Monitoring Arrangements...............................................................................22Whether DB Schemes Had Adequate Governance Arrangements In Place. For Example, DidTrustees Sufficiently Understand The Risks Involved?...................................................................24Whether LDI Is Still ‘Fit For Purpose’ For Use By DB Schemes. Are Changes Needed?.................25Does The Experience Suggest Other Policy Or Governance Changes Needed, For Example To DBFunding Rules?.................................................................................................................................28Annex A.................................................................................................................................................32The Consequences Of Introducing Interest Rate Risks...................................................................33 Introduction This submission is split into three mainparts. The first isa briefoverviewof what we coverin oursubmission. The secondprovidesa commentary on the history of Liability Driven Investment (LDI)from the root causes of the emergence of LDI, to its evolution into leveraged LDI and its subsequentgrowth, and a detailed analysis of the recent market impacts.This includesa discussion of the legalaspects of LDI and leveraged LDI andraisessome of the seriouslegal issuesthese strategies pose.Thethirdsection directlyresponds toeachtopic raised inthe Work and Pensions Committee’scall forevidence. Part I: Overview In any discussion and analysis of LDI it is fundamentally important to distinguish between myriadfeatures of these strategies thatareall too often badged as “LDI”,e.g.,LDI that is in a segregatedmandate vs LDI that is inapooled fund. However, the most important distinction is between LDI andLeveraged LDI. Basic LDI is a strategy based on holding physical assets with contractually promised income streamsthat exactly match the expected levels of future pension payments. To achieve this, a pensionfundcould invest in a portfolio of assets that include gilts and/or other bonds in the knowledge that, if thestrategy works perfectly,i.e.,the issuers of the bonds do not default, the pension fund will receive astream of coupon payments and the repayment of the principalsuch that all pensions are paid in fulland on time as they fall due. This approach is also called dedication.It also requires the assumptionsabout the amount and duration of the pension payments to be borne out in practice. Leveraged LDI is a wholly different strategy. One of the biggest issues of basic LDI is that it is anextremely costly and inefficient way to achieve its intended outcome. As such, leveraged LDI is anattempt to achieve the same outcome, but at a lower cost. Specifically, in a period of low interestrates, leverage is used to reduce the cost of the LDI strategy. By using leverage (borrowing against thegilts in the pension portfolio), leveraged LDI enables the pension fund to increas