The LDI crisis

What is LDI?

Liability-driven investments (LDI) are a hedging product offered by investment banks to defined benefit (DB) pension schemes which uses a range of assets, such as derivatives and gilts (ie government-issued bonds), to construct a portfolio which is designed to move in a similar way to a DB scheme’s liabilities (including as a result of changes in interest rates and inflation) so as to minimise the risk of a funding shortfall and maintain good scheme liquidity levels.

Like other derivative products, LDIs may give rise to ‘margin calls’. The act of buying ‘on margin’ is where an investor, (eg a pension scheme) buys an asset (eg a derivative) but only pays a deposit (also known as the ‘initial margin’). This normally represents a few percent of the value of the contract. As the value of the contract changes (eg if the value of the underlying asset tracked by a derivative falls), additional payments may be requested (known as ‘variation margin' or ‘collateral’).

The government’s mini-budget of 23 September 2022 caused sharp price falls in the financial markets

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Latest Pensions News

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The three European Supervisory Authorities (the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority—ESAs) have published a joint consultation paper on 27 June 2025 containing draft guidelines for integrating environmental, social and governance (ESG) risks into supervisory stress tests for banks and insurers. Developed pursuant to Article 100(4) of the Capital Requirements Directive (Directive 2013/36/EU) and Article 304c(3) of the Solvency II Directive (Directive 2009/138/EC), the guidelines aim to ensure consistency, long-term considerations and common standards in ESG stress testing methodologies across the EU financial sector. They outline expectations for competent authorities regarding the design, governance and operational features of such stress tests, including the need for relevant expertise, access to high-quality ESG data and appropriate timelines for scenario analysis. Responses are sought by 19 September 2025, with a public hearing scheduled online for 26 August 2025.

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As part of its efforts to modernise the UK’s sustainability reporting framework, the government has introduced three consultations intended to “unlock billions in clean energy investment”. In doing so, the government is consulting on how to implement its manifesto commitment to mandate UK-regulated financial institutions (including banks, asset managers, pension funds and insurers), as well as FTSE 100 companies, to develop and implement credible transition plans that align with the 1.5C goal of the Paris Agreement. The government sees transition planning as a vital part of its commitment to secure the UK’s position as the green finance capital of the world. Notably, one consultation from the Department for Energy Security and Net Zero, seeks views on how the government should implement this commitment by ensuring an orderly transition aligned with global climate goals, aiming to enhance transparency to facilitate efficient capital allocation, enabling companies to seize opportunities from the global net zero transition, and bolstering the growth and international competitiveness of the UK’s financial services industry. In particular, the consultation from the Department for Energy Security and Net Zero indicates that during 2025, the Department for Work and Pensions (DWP) will conduct a review of the Occupational Pension Schemes (Climate Change, Governance and Reporting) Regulations 2021, SI 2021/839, utilising evidence provided by the Pensions Regulator (TPR). The DWP regards this review as a logical starting point to assess the effects of the current climate disclosure regime (put in place following the recommendations from the Taskforce on Climate-Related Financial Disclosures (TCFD)) and to consider future steps for climate change reporting. In parallel with the TCFD review, the DWP has tasked TPR with evaluating the feasibility of transition plans within pension schemes. Accordingly, TPR is organising an industry working group, including key stakeholders and major occupational pension schemes, and is set to deliver its findings to the DWP later in 2025.

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