Defined Benefit Pension Funds

Lord Moylan Excerpts

Tuesday 1st November 2022 Lords Chamber

Asked by

[Lord Moylan]

To ask His Majesty’s Government what assessment they have made of (1) the extent of Liability Driven Investment strategies in the management of Defined Benefit pension funds, and (2) the consequences that may arise for (a) His Majesty’s Government’s ability to issue new gilts, and (b) the management of inflation.

[The Parliamentary Secretary, Treasury (Baroness Penn) (Con)]

Defined benefit pensions use liability-driven investment strategies to protect themselves from adverse interest rate and inflation movements. The Pensions Regulator estimates that 60% of defined benefit pension funds have LDIs. The Debt Management Office’s gilt operations are running smoothly, with good levels of demand; its 2022-23 financing remit will be revised alongside the Autumn Statement on 17 November.

[Lord Moylan (Con)]

My Lords, I welcome my noble friend back to the Front Bench. If the pension funds were entering into those risky strategies with a view to eliminating their exposure to interest rate changes, it did not quite work, did it? The Government need to sell gilts to borrow money for their activities. The Bank of England needs to sell gilts to start to reverse quantitative easing and to bear down on inflation. Both those activities were threatened by the sudden discovery of what can only be described as risky and dodgy investment strategies at private pension schemes a few weeks ago. So what I and other noble Lords would like to hear from my noble friend is that those financial positions have now been reversed out of by the pension funds—that they are not pursuing those strategies—so that this does not happen again, and the Government and the Bank can continue with their vital activities.

[Baroness Penn (Con)]

My Lords, LDI strategies can be used as a risk-management strategy for pension funds, and I would expect them to continue to do so. There were specific circumstances which the Bank stepped in to address. But my noble friend is right that it is important that we reflect on what happened to those particular funds in that period and make sure that the Bank of England and the Financial Policy Committee have the right oversight to ensure ongoing stability in these markets.