The Pensions Authority for Ireland has written to the trustees of the largest 30 defined benefit (DB) schemes in the country seeking information about any liability-driven investment (LDI) arrangements that they may have, in response to recent market developments in the UK.
“Although our view is that such a situation is less likely to arise for Irish DB schemes, it would make no sense to be complacent,” said Brendan Kennedy, the Authority’s chief executive officer, during a presentation to the Society of Actuaries’s annual convention this week.
“Our objectives are to understand better the extent of LDI among Irish pension schemes and get an understanding of the nature of what LDI there is. It is far too early to draw any conclusions, but the specific topics we will want to address are trustee understanding and decision making, liquidity, and gearing,” he added.
The regulator wants to know that, where schemes decide to implement an LDI strategy, trustees are making informed decisions, “i.e. that they and not just their advisers, understand the decision that they are making, how LDI will work, and what the risks are”, he said.
“Hence we are addressing our questions to trustees and not to their advisers,” he explained.
As he reminded the convention’s audience that ”the proximate cause of the LDI crisis in the UK was a liquidity issue” caused by a sudden significant fall in UK Gilt prices, he said the regulator was also seeking information about the liquidity tolerance of Irish LDI arrangements.
Furthermore, LDI gearing seems to have been a contributory factor in the UK situation, Kennedy, said, adding that there is a need to understand the role of gearing in Irish LDI.
“It is too soon for the Pensions Authority to form a view on this, but I would say that gearing is a potential concern. In the normal course of pension investing, gearing (i.e. long term borrowing) is not permitted and obviously we would have concerns about any derivative structures which may replicate the economic effect of borrowing,” he said.