At Burges Salmon, we have been keeping a close eye on the LDI (liability-driven investment) crisis which followed the announcement of the Truss administration’s mini-budget in September last year. The first task for any trustee holding LDI investments (or the employer) will have been to identify how those investments performed during the crisis. Most schemes managed to ride it out wholly or largely unscathed, but a number did not and some 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. It is here, where reductions in funding levels were not attributable solely to market movements, where grounds for claims may exist.

One potential area of scrutiny concerns the actions of certain pooled funds. Pooled funds, which might have up to 100 or so schemes invested in them, experienced major challenges when dealing with significant movements in the gilts market and the timing, volume and value of the collateral calls. In some instances the well-known principle of Treating Customers Fairly – TCF – may have been the driving force in deciding that all schemes participating in a fund were deleveraged, irrespective of whether each scheme within the fund could meet its individual collateral calls. For some schemes, TCF will have paid off; for others, being “treated fairly” might actually have resulted in significant and avoidable reductions in funding levels.

Of course, the real driver for TCF in each particular case will need careful scrutiny, for example as against the ability of the funds in any event to deal with the logistics of meeting collateral calls for different schemes and to different timings. Unsurprisingly this is something the FCA is investigating. It is encouraging market participants to learn the lessons of extreme but plausible market movements and the consequence of tail events. It is looking closely at operational lessons, the speed with which liquidity buffers can be re-built and/or funds re-balanced, client and stakeholder engagement and reliance on third parties. It is due to publish a further statement on good practice towards the end of Q1 this year.

Trustees and employers with concerns about how their LDI investments performed ought to 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 respect of TCF and more widely. Any investigation will require a clear governance strategy (what has happened, what can be done about it and who can/should take it forward?), a review of the available evidence (relevant contracts, advisor product presentations and/or proposals, meeting minutes and correspondence), an analysis of the effect of LDI fund performance issues on the scheme’s funding position, and a decision as to how much money should be set aside to investigate the issue (including considering whether any insurance cover is available). Finally, we suggest putting together a clear plan for next steps including an assessment of current options in the market such as credible group actions.

This is a fast-moving area and how schemes look to recover losses – and we do think some schemes have suffered losses rather than just experienced the effects of dramatic market movements – will develop over time. For now at least, it certainly looks likely that claims concerning LDI are set to become a reality.

Our Pensions Disputes team has experience advising on LDI issues; please do get in touch to discuss how we might be able to help.

This article was prepared by Amy Khodabandehloo and Justin Briggs with contributions from Alice Honeywill and Suzanne Padmore.