Lessons learnt from the recent gilt market volatility

Our Head of Investment, Rod Goodyer took part in the Work and Pensions Select Committee inquiry into ‘defined benefit pensions with liability driven investments’.

We welcome this inquiry by the Work and Pensions Committee, as we hope that it helps all stakeholders in the UK pensions system to learn from the recent experiences in gilt markets, resulting in a further improvement in the resilience of the UK’s pensions system. For this reason, we voluntarily submitted evidence to the committee and accepted its invitation to attend the meeting.

Increases in yields on long-dated gilts in late September and early October meant defined benefit (DB) schemes using liability driven investment (LDI) strategies needed to deal with the rapid increase in collateral required to support the LDI trades. 

The Work and Pensions Select Committee’s inquiry is focused on the lessons to be learned from this experience, focusing on the impact of the recent volatility in gilt yields on DB schemes with LDI strategies and their regulation and governance.

Rod Goodyer, Head of Investment at Barnett Waddingham, said: “LDI has served an important purpose over the past twenty years in stabilising pension scheme funding and improving the security of member benefits. We are keen to participate in the industry debate on how changes can be made for the benefit of schemes and their members. 

"We are keen to ensure any changes in legislation following this event have a positive impact on and strengthen member security.”

In our submission, we highlighted lessons we think should be learnt from the recent gilt market volatility. These include:

• lower target leverage of the funds;
• greater flexibility in eligible collateral rules; 
• increased focus on collateral structures/waterfalls;
• a greater focus on the overall liquidity of a scheme’s investment arrangements;
• greater flexibility in LDI benchmarking; and
• a review of dealing cycles.