WPC seeks further information from Pensions Minister in LDI inquiry

The Work and Pensions Committee (WPC) has written to the Pensions Minister, Laura Trott, to request further clarification around some of the recent issues raised as part of the committee's inquiry into liability-driven investment (LDI) and defined benefit (DB) pensions.

In the letter, WPC chair, Stephen Timms, highlighted recent evidence provided as part of the WPC’s inquiry into LDI and DB pension funds from Brighton Rock Group head of research, Dr Con Keating, which suggested that the “use of derivatives to hedge liabilities is also almost certainly illegal”.

In the session, Keating said: “The European directive limits the use of derivatives for investment purposes, for investment risk management. The UK transposition omitted the word “investment” and added a second line, which appears to permit this.

“No English court, to our reckoning, would support that transposition. We believe that a court would just put a line through the added sentences and reinsert the word “investment”. The use of derivatives to hedge liabilities is also almost certainly illegal.”

Timms noted that Keating also expanded upon this issue in written evidence, making the point that, given the purpose of the directive is to protect against excessive risk taking by pension schemes, it would “seem strange that its restriction on borrowing could be easily circumvented by economic borrowing using repos.”

In light of the concerns raised by Keating, the committee has requested further information as to whether the government took external legal advice on this issue, its reasoning for making the amendments, and a description of the processes involved in transposition.

The committee requested a response from the minister by Friday 9 December.

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