Current high levels of inflation are causing strain on LDI collateral pools as a result of rising gilt yields, and DB Schemes must take action, Hymans Robertson warns. The leading pensions and financial services consultancy says that DB Trustees must do much more to stress test their pool especially as further interest rate rises remain likely over the remainder of this year. Trustees must ensure there is an acceptable level of resilience in place.

Commenting on the impact of rising inflation and rates for LDI portfolios, Elaine Torry, Co-Head of DB Investment, Hymans Robertson says:

“UK inflation is at its highest rate in 30 years but it is the predicted further increases in interest rates and gilt yields throughout 2022 that could lead to a dramatically changing investment landscape, with pressure felt from a reduction in collateral within LDI portfolios.

“If interest rates continue to rise and inflation stabilises, this should be a ray of hope for scheme funding and an opportunity for trustees to take steps to further secure members benefits. Despite this, such hope may be fleeting for those schemes where their LDI collateral pools are starting to reach critically low levels. Trustees of DB schemes should therefore stress test their collateral pool to ensure that there is an acceptable level of resilience and take action where appropriate.

“Action now will enable a full assessment to take place and ensure gaps are identified before funding gains are eroded by forced asset sales leading to a collateral headache. Schemes must review their LDI and supporting arrangements as a matter of priority, ensure they fully understand the proximity to critical leverage levels and have plans in place replenish the collateral pool in a controlled, cost-effective way.”