The Irish Pensions Authority has written to trustees of the 30 largest defined benefit (DB) pension schemes seeking information about any liability-driven investment (LDI) arrangements they may have.

Speaking at the Society of Actuaries in Ireland annual convention, The Pensions Authority chief executive and Pensions Regulator, Brendan Kennedy, confirmed that the authority has been carefully following recent issues with LDI in the UK.

Although Kennedy clarified that “such a situation is less likely to arise for Irish DB schemes,” he emphasised that it “would make no sense to be complacent”, with the Irish Pensions Authority therefore seeking to better understand the extent of LDI among Irish pension schemes and the nature of what LDI there is.

Kennedy said that it is "far too early to draw any conclusions", with the authority currently looking to address a number of specific topics, including trustee understanding and decision making, liquidity, and gearing.

"We want to know that, where schemes decide to implement LDI, the trustees are making an informed decision," he explained. "Hence we are addressing our questions to trustees and not to their advisers."

"As we know, the proximate cause of the LDI crisis in the UK was a liquidity issue, caused by a sudden significant fall in UK gilt prices. We are seeking information about the liquidity tolerance of Irish LDI arrangements."

Kennedy also noted that LDI gearing seems to have been a contributory factor in the UK situation, suggesting that while it is too soon for the Pensions Authority to form a view on this, "gearing is a potential concern".

"In the normal course of pension investing, gearing (i.e. long-term borrowing) is not permitted and obviously we would have concerns about any derivative structures which may replicate the economic effect of borrowing," he added.

Reflecting on recent market events more broadly, Kennedy acknowledged that there has been “significant losses in some sectors of the equity markets", as well as a big jump in inflation and increases in bond yields.

In light of this, Kennedy suggested that the most important lesson to draw from recent events is the unpredictability of longer-term investment, emphasising that “no-one in 2021 predicted a scenario such as 2022 has turned out to be”.

He continued: “This is a reminder that in the investment and financial management of pensions, whether DB or defined contribution (DC), trustees and their advisers must avoid the temptation of managing their scheme based on a single long- or medium-term narrative.

"The reality is that the narrative, if there is one at all, keeps changing. The objective in running a scheme must be resilience in the face of a wide range of possible outcomes. I certainly do not mean that schemes must avoid risk: in most cases, this would be inappropriate and unrealistic.

"But the economic and investment environment will always be changeable and unpredictable, and this must be recognised by trustees and their advisors.

"Among other things, this emphasises the importance of trustees having a comprehensive understanding of the financial situation and dynamics of their 2 scheme.

“We have emphasised before that there is no single number that can capture the complexity of the DB scheme, and in particular, the need to monitor solvency, risk and sustainability measures."

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