Trustees need to be actively considering the impact of the Gilts crisis and subsequent changes and guidance, said consultancy XPS Pensions Group.
In the firm’s latest investment briefing, Ben Gold, head of investment, and Mark Minnis, head of LDI research, stated that trustees should be reviewing their liability-driven investments (LDI) managers and shoudl be able to understand how they performed during the crisis and the nature of the factors that led to the Gilt crisis that started last September.
Trustees should also be able to understand what changes they’ve made to their LDI operation since the crisis and should be able to review their arrangements against The Pensions Regulator’s (TPR) detailed guidance, including ensuring trustees have an appropriate collateral management strategy with a plan for realising additional collateral – possibly at short notice – if needed, the duo recommended.
The firm’s experts also noted that trustees should be undertaking stress testing to ensure robustness and reviewing their own operational procedures to make sure they can react quickly if needed.
Gold said: “The crisis also highlighted that other factors, such as poor client service, can have significant consequences. Not being able to speak to your fund manager client service team meant you might have been prevented from replacing your hedge in time. A holistic understanding of your LDI manager’s capability has been shown to be fundamental to schemes’ financial performance.”
Trustees should be carefully monitoring their LDI portfolio going forwards, XPS said, adding that it has launched an LDI Oversight Service to help trustees review their LDI arrangements.
This new service will cater for existing XPS clients or as a stand-alone service alongside advice from an incumbent investment consultant. It will draw on XPS’s comprehensive understanding of the market to make objective assessments of a scheme’s arrangements., including understanding how a manager performed during and after the crisis and what steps have been put in place since to protect against a repeat.
Mantaining hedging, liquidity levels
The firm’s latest research into the LDI crisis showed that the best-performing managers were those that were able to maintain both hedging levels, and liquidity/solvency of their pooled funds.
Schemes’ funding positions were likely to be negatively impacted if their manager implemented forced reductions in hedging or experienced liquidity issues. XPS estimated that a typical scheme’s overall funding position would have been eroded by 1.5% for every 10% of hedging reduction, with the average hedge reduction ranging between 4% and 16% across the LDI managers.
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