More than half (52 per cent) of UK finance decision makers believe defined benefit (DB) pension schemes are more likely to run on for longer as a result of the liability-driven investment (LDI) crisis, research by Law Debenture has revealed.

Following the mini budget in Autumn 2022, UK pension funds using LDI strategies faced a liquidity crunch due to a sharp spike in gilt yields, leading to the sale of gilts to raise cash, and an intervention from the Bank of England was required to stop the crisis restore stability.

This had a “significant” impact on DB schemes, with the majority seeing an increase in funding.

More than six in 10 (61 per cent) said this increase in funding occurred in the short term after the crisis, while 58 per cent said it increased in the medium term (between two months and one year after the crisis) and 56 per cent said it increased in the long term (over one year until now).

However, 17 per cent said funding had worsened in the short term, while 15 per cent said it had worsened in both the medium and long term.

Law Debenture's research found that the LDI crisis also had an impact on the way financial decision makers approach their schemes, as 100 per cent of respondents stated that the LDI crisis had an impact in one way or another.

In particular, the survey found that 52 per cent think that their DB scheme is now likely to run-on for longer, while 35 per cent felt their schemes are more likely to run on for good, 9 per cent believed schemes are more likely to reopen.

In contrast, just 3 per cent felt it had accelerated the time in which a scheme will move to buyout.

Law Debenture Pensions managing director, Sankar Mahalingham, said there was no doubt that the LDI crisis “sent shockwaves” through trustee boards and their scheme sponsors.

“What is now apparent is that for many schemes those turbulent weeks in 2022 led to a stronger funding (and often surplus) position, which has in turn led to corporate sponsors being more inclined to consider run-on as a possible solution in the medium or longer term,” he continued.

“The recent government announcement on changes to the surplus regime is therefore very timely.

“The new, more welcome, challenge for decision-makers (both corporates and trustees) is how to manage any surplus - something that may be new territory for many.”

He suggested that an independent professional trustee could help navigate a scheme through surplus discussions, taking account of the legal and legislative framework and balancing the interests of members with consideration of the views of the sponsor.

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