The government has accepted a number of the Work and Pension Committee’s recommendations on liability-driven investment (LDI), confirming that it will be laying the draft defined benefit (DB) funding regulations before parliament "in due course”.

The WPC previously urged the government to “halt” their existing plans for a new funding regime, after its inquiry into LDI revealed a number of industry concerns.

In particular, the committee identified two "fundamental concerns” in the new DB funding regime; that the approach is not sufficient to allow open schemes to thrive, and that it will result in greater ‘herding’ in investment decisions.

In its response, however, the Department for Work and Pensions (DWP) confirmed that it plans to lay the draft Occupational Pension Scheme (Funding and Investment Strategy and Amendment) Regulations 2023 before parliament in "due course", which will address the concerns identified by the committee.

It also confirmed that a full impact assessment will accompany the draft regulations, which will consider the interactions of the regulations with the wider macroeconomic environment.

These issues, according to the government response, will also be monitored closely by the Secretary of State for the DWP and through regular assessment of the data collected by the Office for National Statistics, the Pension Protection Fund (PPF) and The Pensions Regulator (TPR), and DWP will publish a report at least every 5 years.

Both the goverment and TPR have previously confirmed that work was underway to address industry concerns around the DB Funding Code, with further updates on the code previously slated for "autumn" 2023 following a number of delays, in part due to the government wanting to consider parliamentary committee recommendations following the LDI crisis.

Building future resilience

The government response also provided a broader update on the work being done by policymakers in the DWP and HM Treasury, in partnership with TPR and the Financial Conduct Authority (FCA), to understand the 2022 LDI crisis and take steps to build resilience.

In particular, the DWP said that it has been working with TPR to understand the impact on pension schemes of the LDI episode and address the WPC’s concerns around the lack of data.

As part of this, it confirmed TPR is conducting further analysis on scheme assets, liabilities and funding changes over 2022, which will consider the key factors which contributed to scheme funding improving or deteriorating, including the role played by LDI strategies.

In light of the limitations of data collected by TPR on LDI prior to the events of 2022, TPR, the FCA and the Bank of England's (BofE) will also be using an enhanced version of this data set to monitor the resilience of the sector.

To support this, TPR will be augmenting the existing data, with other sources to create a richer picture for the committee. A report on this work is expected to be published by the end of 2023.

TPR will also be introducing new questions to the scheme return which trustees of DB schemes are required to make to them annually, which is expected to improve TPR’s oversight of asset liquidity outside LDI mandates.

Alongside this, TPR will be surveying investment consultants and schemes to check that governance and operational procedures are being implemented in line with TPR’s guidance.

The DWP will then consider, in light of TPR’s findings, whether changes to disclosure requirements are appropriate.

This increased data collection is also expected to help ensure that TPR is better incorporating financial stability considerations in its decision making, as previously recommended by the BofE Financial Policy Committee.

In its response, the government said that it accepts the FPC’s recommendation and wants TPR to be more connected within the financial stability ecosystem and bringing the added value of TPR’s pensions expertise without duplicating capability held by other regulators.

Rather than extending TPR's remit, however, the government response suggested that enabling TPR to be a source of key information through data collection will be a "sensible means" of ensuring that TPR is incorporating financial stability considerations.

Given this, it confirmed that TPR is looking to set up protocols with the BofE to ensure, as a pensions regulator, they are working cohesively with the wider financial regulatory system.

Collaborative working is also already underway, as the DWP pointed out that both TPR and the FCA are also supporting the BofE with their System Wide Exploratory Scenario exercise.

Extending the regulatory reach

The government response also provided an update on whether investment consultants should be brought within the FCA’s regulatory perimeter, after the WPC urged the government to introduce plans on this before the end of this parliament.

“The government welcomes the committee’s recommendation that investment consultants are brought within the FCA’s regulatory perimeter," it stated.

"The DWP and HMT call for evidence on pension trustee skills, capability and culture considers the role of advice and includes that of investment consultants. The aim is to improve DWP and HMT’s understanding of these areas and inform future policy.

"The government will take the committee’s views into account – alongside the perspectives of the Competition and Markets Authority, the FCA, and the FPC – as it assesses its next steps."

Commenting on the government's response, WPC chair, Stephen Timms, said: “The commitment by the government and TPR to improve oversight, governance standards and the management of systemic risk is a welcome step in the right direction.

"What we need to see now is a clear timeline for taking the measures forward. The committee will be keeping a close eye on progress.”

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