The U.K.'s Work and Pensions Committee is looking for answers to questions surrounding recent chaos in gilt markets and liability-driven investment portfolios.
In a call for evidence, the government committee said it wants to hear "from anyone with answers to the questions" on how increases in gilt yields late last month and early this month affected pension funds. It also wants to know whether the Pensions Regulator — the watchdog for corporate retirement plans — "has taken the right approach in regulating the use of LDI and had the right monitoring arrangements," whether pension funds had adequate governance arrangements in place, whether LDI is still fit for purpose for use by defined benefit funds and whether policy or governance changes are necessary.
Pension funds using leveraged LDI strategies to hedge liabilities faced huge collateral calls over recent weeks as a set of unfunded tax cuts announced by the government sent gilt yields soaring and prices plummeting. While rises in yields reduce liabilities, pension funds still had to find suitable collateral to post and keep their hedges in place. Funds sold out of gilts and other liquid assets, which exacerbated the price drops, and the Bank of England stepped in with an emergency bond-buying program on Sept. 28.
The tax cut plans have since been cancelled by the U.K.'s new chancellor of the exchequer, Jeremy Hunt.
The committee said its short inquiry on the lessons learned from the recent experience will be followed up in the new year with a further, wider investigation into DB funds. Issues in the next inquiry are likely to include DB funding requirements, the committee said in a news release.
"Recent economic volatility and the intervention of the Bank of England has highlighted the risks of defined benefit schemes using liability driven investments," Stephen Timms, chairman of the Work and Pensions Committee, said in the release. "Our inquiry will examine whether there are sufficient safeguards in place to protect the value of pension funds. It will also look at the role of trustees and the regulator in ensuring proper governance arrangements and whether LDIs are still fit for purpose for use by defined benefit schemes."
The committee must receive answers to the six questions it has posed by Nov. 15. Answers can be submitted through the committee's website.