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The Bank of England was forced to intervene to stabilise the gilts market on 28 September 2022 and this led to a return to more normal trading in the LDI markets (gilt yields fell by more than 10% on the day of the intervention). However, many lessons have been learnt and trustees, the Government and the pensions industry more generally are ...
- How Did A Small Corner of The Pensions Industry Threaten Financial Stability?
- What Does This Episode Remind Us About The Risks from Non-Bank Leverage?
- The Market Channel
- The Counterparty Channel
- Are These Risks Unique to Non-Banks?
- Conclusion
Many UK DB pension schemes have been in deficit, meaning their liabilities – their commitments to pay out to pensioners in the future – exceed the assets they hold. DB pension schemes invest in long-term bonds to hedge the interest rate and inflation risk that arises from these long-term liabilities. But that doesn’t help them to close their defici...
Leverage is an integral part of the economy. It allows households to borrow to buy houses and smooth consumption. It allows companies to invest in projects or to smooth cashflows. It allows banks to finance these activities. In the non-bank financial system, leverage is used: to facilitate trading; to invest in companies and infrastructure; and to ...
Let’s start with the market channel. Here excessive or poorly-managed leverage increases the potential for forced asset sales in the face of shocks, with adverse implications for market functioning and so the real economy. Feedback loops and amplification mechanisms can arise in two ways – through unexpected liquidity strains (most obviously as a r...
Now let’s turn to the counterparty channel ‒ where leverage increases the risk of an entity’s default and so brings losses for their counterparties, threatening the resilience of systemically important firms and so the real economy. Margins are at the core of bank and CCP toolkits for managing these counterparty risks. They are essential to stop ca...
I think it’s helpful at this stage to ask whether these issues are unique, or if we’ve tackled them before in other contexts. And with that in mind, I’ll draw a very brief comparison to a market which has already been widely studied and embedded in the macroprudential toolkit: the mortgage market. Banks manage their exposures to mortgagors, through...
Events of recent weeks, months and years have once again reminded us of the systemic risks posed by poorly-managed leverage in the non-bank financial system. All too often excessive risk taking alongside improper liquidity risk management has threatened conditions in the real economy - an issue that feels especially pertinent in the current environ...
Raj Mody is joined by Lauren Brady, Solution Designer in the Client Solutions Group at Insight Investment, and Sam Seadon, pensions investment advisory lead for PwC, to discuss the Liability-Driven Investment (LDI) events of Autumn 2022 were unprecedented for the UK pensions industry. Assets widely regarded as being “risk free” saw their value fall by more than half in the space of a week.
Sep 29, 2022 · In fact, the basic concept of “liability-driven investing,” or LDI, just means planning your investments’ cash payouts to your future cash needs. In a simple world, you wouldn’t need ...
Feb 3, 2023 · LDI is just jargon for matching pension assets and liabilities, exactly what Boots pioneered 20 years ago. As well as switching from equities to long-dated bonds, including index-linked, this also ...
- John Ralfe
Oct 5, 2022 · LDI became an asset management product, not a transaction. Between 2014 and 2018, LDI kept doing its job of offsetting yield falls for the increasing number of schemes who now using it. By then ...
People also ask
How has the LDI market changed over the years?
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What is LDI & how does it work?
What happened to LDI funds?
Should LDI funds be pooled?
Jun 23, 2023 · The Bank’s intervention allowed LDI funds to rebalance and rebuild their resilience to manage future moves in the market. The Pensions Regulator (TPR) said in April 2023 that most pension schemes had improved funding levels through a combination of investment performance and a significant rise in gilt yields (which has the effect of reducing the present value of liabilities).
