2022 has been another year of surprises that tested pension schemes in new and varied ways. Where this leaves each scheme will depend on numerous individual factors. But, as we look to 2023, we believe there are three core areas that all trustees should consider:

1. Review your governance model

The ‘LDI crisis’ tested pension schemes governance models to the limit and will hopefully not be repeated. This aside, the last few years – covering the fallout from Brexit, the Covid pandemic and the mini Budget – have shown there is no room for complacency.

Schemes should therefore be looking at their governance models to ensure decisions can be taken and implemented swiftly and efficiently in times of market shocks. It would make sense for trustees to review their decision making process, identify any areas which would be better outsourced and have contingencies in place for times of stress, such as an accelerated decision
process. Ensuring all advisors are clear on their roles and expectations will also streamline the process.

2. LDI is not all equal

LDI has served as an invaluable tool for pension schemes over the last twenty years. It has resulted in stronger and
more stable funding levels and lower dependencies on sponsoring companies.

Andrew Stewart, Head of Client Solutions

There has been a view that it is a commoditised asset, but we have learnt otherwise in the
recent crisis which has seen distinct winners and losers.

Schemes should be carrying out post-mortems of recent events and health checks to understand how their LDI mandate performed. In particular, was the strategy clear,
was the structure operationally resilient and were lines of communication open and transparent?

3. Liquidity management will be more important

Many schemes have become less liquid. Asset allocations have been disrupted to cover LDI collateral calls, schemes are undertaking incremental buy ins and maturing schemes mean larger liability payments. The LDI crisis has highlighted the importance of short-term
liquidity.

These factors mean it is crucial that schemes reassess their liquidity profile. Key considerations include:

• Did the LDI crisis highlight that assets considered liquid were not liquid enough?
• If you have illiquid assets, have they grown as a proportion of the total, will they make further drawdowns and when will they return capital?
• What’s the plan for meeting ongoing cashflows, including both expected and ad hoc liability payments?

Despite the challenging end to the year, there are reasons to keep calm and carry on…but just not as you did in 2022.