Welcome to Hogan Lovells UK pension team's October 2022 newsletter.
The past fortnight has demonstrated how pension schemes can be significantly impacted by unexpected turmoil in financial markets. Many defined benefit (DB) schemes with hedged liabilities (including as part of a liability driven investment (LDI) strategy) faced calls to post collateral in response to the rapid increase in gilt yields, giving rise to liquidity difficulties for some.
After dealing with the initial shock to investments and managing short-term liquidity needs, what can trustees do to ensure that they are well prepared to respond to any future disruption?
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Consultation on draft funding and investment strategy regulations closes on 17 October. If enacted in their current form, the regulations will represent a significant tightening of government expectations for defined benefit (DB) scheme funding.
The High Court has rejected a challenge by trustees of three large pension schemes to the reform of the Retail Prices Index (RPI). The government confirmed in November 2022 that it intends to align the RPI with the Consumer Prices Index including Housing (CPIH) from 2030.
The reform will create winners and losers: pension schemes (and other investors) holding index-linked gilts or other RPI-linked assets could see falls in asset values and deterioration of scheme funding. In contrast, schemes with RPI-linked benefits could see the value of liabilities fall (and scheme funding levels improve).
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