The chain of events that led to the UK’s liability-driven investment (LDI) crisis, a high-profile inquiry by the UK Parliament, and a time of anxiety and introspection in the country’s pension industry, started well before then prime minister Liz Truss’s government and its somewhat reckless ‘growth plan’. 


By now it is clear that the crisis was a systemic failure, caused by a wide range of factors, including poor oversight, a lack of transparency and information, a poorly developed understanding of risk management, inadequate products and a relatively low degree of collaboration in the industry. Politics also had its role, from Brexit to the extreme Thatcherism of the UK Conservative Party.

The systemic nature of the crisis goes far beyond the network of pension schemes, Gilt markets, fiscal and monetary authorities. It seems that the system in which UK defined-benefit (DB) pension schemes operate was created in a different era, when capitalism was focused more on shareholders than on stakeholders. 

Whether that is a valid distinction is up for debate, but it appears that accounting standards that are meant to safeguard corporate balance sheets are in no small part responsible for the predicament that UK DB pension schemes find themselves in. The use of the present value of pension liabilities in determining pension deficits is one of the key reasons why pension schemes have turned to liability-driven investing.

As a result, the £1trn (€1.13trn) of liabilities of UK DB schemes act as a real drag to economic growth in the country, by weighing on corporate balance sheets. The UK government has called on pension schemes to invest more in the UK, but that would expose them to significant risks. DB pensions, by regulatory design, are guaranteed and there is no getting out paying them, and trustees are first in line to ensure their safety, which forces them to spread risk and avoid over-exposure to any economy or sector. 

In such a complex system, it is far too easy to point fingers at any group or actor. Accounting standards, financial engineering, the zeal of investment advisers and asset managers are all part of the problem, but focusing the blame on any individual element, or a discrete set of elements, is counterproductive.

Thinking of the crisis from a systemic perspective, that must be dealt with on several levels, should help recognise that each actor must play their part in relation to the others. For instance, trustees should be more proactive when it comes to crisis management, but it requires resources that cannot necessarily be sourced at individual scheme level. 

Regulators should be more demanding in terms of information, but also more open to discuss flexibility in regulatory frameworks. Advisers need to think deeply about their role and consider whether complexity is always the best answer.

Perhaps little can be done by the pension industry about the politics of the UK. That is almost counterintuitive, given that politicians should be the more expendable in society. 

But if ultimately the industry’s is true to its mission of safeguarding pensions, even politics should not stand in the way, and the industry should play its part in restoring faith in the UK political system. Industry players blaming each other is not going to achieve that. 

Carlo Svaluto Moreolo, Deputy Editor