PLSA comments on the Bank of England Policy Committee's assessment on LDI
29 March 2023
Joe Dabrowski, Deputy Director – Policy, PLSA, said: “Liability-driven investment has worked well for schemes over two decades of falling interest rates and has resulted in defined benefit pensions being much better funded against their liabilities.
“Since the unprecedented speed in gilt repricing following the mini-Budget last autumn, there has been much commentary about how pension schemes should manage the risk of potential volatility in future.
“One of the most effective ways schemes can manage this risk is by holding additional collateral, although this does come at the cost of potentially reducing some investment in growth assets.
“It is therefore important that recommended levels of collateral reflect the current stage of the interest rate cycle. More than half of the DB funds surveyed by the PLSA were holding more than 250bps additional collateral in the wake of the mini-Budget and have since strengthened their positions further given uncertainty about the future direction of monetary policy.
“The PLSA looks forward to seeing the regulator’s update of their stress testing, and underpinning analysis to see their assessment of systemic risks."
Bank of England Financial Policy Committee’s assessment of appropriate resilience in pension schemes' use of liability-driven investment strategies.
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