The Work and Pensions Committee (WPC) has launched an inquiry into defined benefit (DB) pensions with liability driven investments (LDI), following recent volatility in the gilt markets.

The inquiry will be looking to explore the lessons learned from recent experiences, focusing on the impact of the recent volatility in gilt yields on DB schemes with LDI strategies and their regulation and governance.

The committee has launched a call for evidence to inform the inquiry, which is open until 15 November.

In particular, WPC is looking for evidence of the impact of the rise in gilt yields in late September and early October on DB schemes, the impact on pension savers, whether in DB or defined contribution (DC) arrangements, and whether LDI is still “fit for purpose” for use by DB schemes.

It is also seeking views on whether The Pensions Regulator (TPR) has taken the right approach to regulating the use of LDI and had the right monitoring arrangements, and whether DB schemes had adequate governance arrangements in place, for instance, whether trustees sufficiently understood the risks involved.

The issues around LDI investments made national headlines after increases in long-dated gilt yields meant DB schemes using LDI strategies needed to deal with a rapid increase in collateral to support LDI trades, triggering market interventions from the Bank of England.

The WPC clarified that this is expected to be a “short inquiry”, with work in this area to be built upon further though a separate inquiry in the new year, which will look at DB schemes more widely.

A separate call for evidence for that inquiry will be made in due courses, which is expected to include issues such as DB scheme funding requirements and arrangements to protect pension benefits when a scheme is wound up.

TPR previously defended itself against accusations of having not taken "stronger action" to prevent the recent turmoil in response to a previous letter from the WPC, arguing that the watchdog has "consistently alerted trustees to liquidity risk".

TPR also reassured members that DB pension schemes "were not and are not at risk of collapse", while the Bank of England has since confirmed that the risk of LDI funds triggering a fire sale dynamic in the gilt markets has been "significantly reduced" as a result of the recent market interventions, as LDI funds have built up enough capital to withstand “much larger increases in yields than before”.

Commenting on the launch of the inquiry, AJ Bell head of retirement policy, Tom Selby, emphasised that while there was a "significant cashflow issue" facing LDI strategies amid the recent volatility, reports of pension funds facing insolvency were "at best hyperbole and at worst downright scaremongering".

He continued: “As the committee digs into what went wrong with LDI funds, it is important consideration is given to the confusing and potentially damaging headlines millions of savers and retirees saw as a result.

“Talk of pensions ‘crisis’ and the risk of pension funds becoming ‘insolvent’ caused lots of people to fear they risked losing their entire retirement pot.

"This was simply not the case. Even DB scheme members’ pensions would only have been threatened if the sponsoring employer’s solvency was threatened – and nobody was arguing this would happen.

“Clearly part of the challenge here is to redouble efforts to boost engagement and understanding around retirement issues. But it is also crucial the committee reflects on the role of those involved in disseminating complex information to savers, including officials, pundits and journalists.

“The central problem with LDI might have been inadequate preparation for a world of rapidly rising gilt yields, but the way those problems were communicated to the wider public caused untold damage to people’s perceptions of pensions.”

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