PRAG issues thoughts on the impact of the Liability-Driven Investment Crisis

The Pensions Research Accounting Group (PRAG) has issued an article outlining their thoughts around the possible impact of last autumn’s gilt yield crisis on the annual report and accounts of UK pension schemes.

The significant rise in gilt yields, which gained significant press coverage during 2022, had a big impact on schemes, particularly defined benefit schemes with Liability-Driven Investment (LDI) portfolios, who had to react quickly to adjust collateral positions.

The crisis caused schemes to sell in falling markets and dispose of liquid assets to provide the additional collateral required. It may have led to departures from the scheme’s strategic asset allocation, an unusual volume of transactions, and decreases to asset values. It will have also impacted on scheme funding, therefore influencing what is seen throughout the annual report and accounts.

PRAG’s article highlights the different areas which may benefit from some comment, explaining the impact on the scheme. The areas for potential further disclosure include:

• The Trustees Report - investment section
• movements in investments
• collateral disclosures
• risk disclosures.

It may not be limited to investment disclosures, there could be further considerations, such as:

• related party transactions (if loan arrangements have been entered into)
• going concern
• impact on actuarial liabilities.

Defined contribution schemes were also impacted, with decreases seen in the value of funds holding cash and bonds. This is particularly relevant for scheme members closer to retirement with investments in lifestyle funds which hold these assets. However, these members could also benefit from the fact that annuities have become cheaper.

Trustees need therefore to consider the impact that has been felt and identify the key messages that they want to convey to their members.

The article does not provide guidance, it is intended to generate discussion. The PRAG executive would welcome any further contributions to this discussion, using the email address [email protected].