'No easy road' for DB schemes considering LDI-claims

Legal experts have said that claims relating to liability-driven investment (LDI) are likely to become a reality following the liquidity issues faced by defined benefit (DB) schemes after the 2022 mini-Budget, although this is expected to take "a long time to play out".

Inquiries around the use of LDI in DB schemes have been ongoing since the market volatility seen in September, as regulators and industry experts remain divided on the root causes behind the issues faced.

However, whilst industry trackers have suggested that many DB scheme funding levels improved amid the volatility, Burges Salmon associate, Amy Khodabandehloo, and partner, Justin Briggs, pointed out that “some schemes have suffered losses rather than just experienced the effects of dramatic market movement".

In a blog post, the pair explained that whilst most schemes managed to ride out the market volatility “wholly or largely unscathed”, a number did not and saw "substantial reductions" in funding levels.

“Some of those reductions will simply have been the consequence of market movements – we are all familiar with the warning that investments can go down as well as up – but in some cases, other factors may also have been at play,” they explained.

“It is here, where reductions in funding levels were not attributable solely to market movements, where grounds for claims may exist.”

The pair suggested that those trustees with concerns about how their LDI investments performed should take steps now to investigate their positions and determine if and how things could and should have been done differently following the mini-budget in September.

In addition to this, they also suggested putting together a clear plan for next steps including an assessment of current options in the market such as credible group actions.

However, Khodabandehloo and Briggs clarified that this is a “fast-moving area”, explaining that how schemes look to recover losses is set to develop over time.

This was echoed by Arc Pensions Law senior partner, Anna Rogers, who suggested that “this is going to take a long time to play out”.

“Some schemes did crystallise losses in the LDI turmoil and for them it has to be worth looking at their contracts, but I doubt there is an easy road to recovering any meaningful compensation,” she continued.

"Even if there are trustee-friendly clauses, asset managers and investment consultants are going to have defences.”

Alongside considering potential claims, industry experts previously suggested that there could be a continued evolution of LDI in 2023 in the wake of this years’ experience, whether involving improved governance or variation in investment strategy.

Changes are also expected in pension scheme investment strategies, with the aftermath of the LDI crisis expected to have prompted “almost all” UK defined benefit (DB) to revisit and significantly revise their investment strategies.

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