Liquidity and leverage

In line with TPR guidance issued in April 2023, as a trustee, you must ensure you have the right controls and governance around LDI.

You need to be confident that you have ways of working with your advisers and managers in place so you can act quickly and effectively, particularly in a crisis. This is especially true if you have high levels of leverage, meet infrequently as a trustee board, or have more infrequent contact with advisers.

We are asking you for details of your liquidity and leverage and the controls you have in place. We use this to assess whether our guidance is effective and identify areas where stronger controls may be required.

Answering the questions as at the report and accounts date

We expect you to complete the sections below as at the 'accounts date'. This is the same date at which you will have completed the scheme return asset breakdown.

• LDI mandates
• Standalone synthetic equity mandate
• Availability of liquidity

If you are unable to provide accurate data as at this date, or it would be burdensome to do so, we will accept an estimate.

For the avoidance of doubt, we expect you to complete all other sections based on the scheme's arrangements as at the date of submitting the scheme return.

Questions

Does the scheme use leveraged LDI?

If your scheme uses leveraged LDI, this means:

• you use financial instruments to increase your allocation in certain assets such as gilts, index-linked gilts, and fixed-income derivatives
• the financial instruments you use require you to provide collateral to counterparties as security

LDI mandates

In this section, we ask you to create a list of the scheme’s leveraged LDI mandates.

Segregated mandates

If your scheme has a single segregated LDI mandate, add one entry for that mandate.

If your scheme has more than one such mandate (for example, with different managers), add separate entries for each mandate.

Bespoke pooled 'fund of one' mandates

If your scheme has LDI assets that are all wrapped up into a single bespoke pooled 'fund of one' LDI mandate, add one entry for that single pooled fund.

If your scheme has more than one such bespoke pooled mandate, make separate entries for each mandate.

Pooled fund mandates invested alongside other schemes

Otherwise, the overall mandate with the LDI manager will typically comprise different pooled funds with no overall fund wrapper. If this is the case, create a separate entry for each leveraged LDI pooled fund you invest in.

Disregard any unleveraged funds you hold with the LDI manager. For example, your LDI mandate may comprise separate funds for:

• leveraged nominal gilts
• leveraged index-linked gilts
• liquidity fund
• unleveraged index-linked gilts

In this case, you would add two entries to the list. One entry would be for the leveraged nominal gilts and another would be for the leveraged index-linked gilts.

Questions

Asset manager name

Is the LDI mandate pooled or segregated?

Select 'Pooled' if this mandate is either a pooled fund:

• where several different pension schemes exist
• that has been set up for just for your scheme, such as a 'bespoke pooled fund' or 'fund of one'

What is the net asset value of this LDI mandate as a proportion of the scheme’s total assets?

The net asset value (NAV) is the amount of the mandate as stated in the scheme’s overall asset valuation.

What is the yield buffer to zero NAV of this LDI mandate?

For inflation-linked mandates, enter the increase in nominal yields that would cause the NAV to fall to zero rather than the fall in inflation expectations.

Enter the actual yield buffer rather than the target buffer. The manager of this LDI mandate will be able to supply this information.

If the yield to zero net asset value (NAV) is more than 1000 basis points, enter 1000.

Calculate the answer with reference to the entire collateral pool available within this individual LDI mandate. For example, where the collateral pool is used to back both interest rates and synthetic exposure to another asset class, assume the whole collateral pool backs the rates portion of the mandate only.

For the purposes of calculating the buffer, ignore the fact that both sources of leverage share a single pool).

Does this LDI mandate expose the scheme to any other asset classes beyond (nominal or real) interest rates?

Select the exposure beyond (nominal or real) interest rates provided by this mandate.

Standalone synthetic equity mandate

A synthetic equity mandate uses derivatives to gain all or substantially all of the equity market exposure.

Does the scheme use a standalone synthetic equity mandate?

Answer ‘Yes’ if the scheme holds a standalone synthetic equity mandate which can generate a demand for capital from the rest of the scheme's investments in order to maintain the synthetic exposure.

Availability of liquidity

In this section, we ask for a breakdown of scheme assets by the frequency on which they regularly trade? This helps give us a general understanding of how frequently the scheme’s assets regularly trade.

What is the breakdown of scheme assets by the frequency on which they regularly trade?

For pooled fund holdings, answer this question by reference to frequency of the managers’ standard dealing cycles. Disregard notice periods and the potential for pooled funds to be gated by the manager. If they are a type of pooled fund that does not have a dealing cycle as such, select ‘less than quarterly’.

For segregated mandates of predominantly listed assets, like a global equity or bond mandate, select ‘daily’.

For segregated mandates of unlisted assets, such as a real estate mandate, select ‘Less than quarterly’.

This simple approach is intended to give us a broad indication of the liquidity of the underlying assets.

Delivery of liquidity

This question refers to when an LDI manager issues a routine request for additional capital.

In how many business days are the trustees capable of carrying out the necessary transfers and fulfilling the request for capital?

This question is about the timeliness with which the trustees are able to carry out a transfer of funds when required, regardless of the timescales allowed by the LDI manager for capital to be provided. It is meant to be answered with regards to the trustees’ own governance arrangements and the characteristics of the investments which they expect to sell to raise the required transfer capital.

This question refers to when an LDI manager issues a routine request for additional capital. It concerns routine collateral calls to replenish the operational collateral buffer, rather than ones to replenish the stress collateral buffer in a period of extreme market movements.

To answer this question and those following, you will find it helpful to understand the typical size of the scheme’s routine collateral calls to replenish the operational collateral buffer, and answer with that size of call in mind. Your LDI manager or investment consultant will be able to help with this.

We would like to know the elapsed time in business days between:

1. receiving the formal capital request
2. deciding what to sell to meet it
3. issuing the signed sale instructions
4. the sale taking place, allowing for any dealing cycles
5. the settlement proceeds being received and then delivered to the LDI manager

If the assets concerned include pooled fund holdings with non-daily dealing dates, assume that you have just missed a dealing date, the worst-case scenario.

If the process involves delivering assets in actual form (in specie) to the LDI manager rather than cash, include the time it will then take the manager to convert them into eligible collateral.

If you have given a third party authority to sell assets and carry out transfers up to a maximum amount, beyond which trustee action would be required, then:

• if the typical size of the scheme's routine collateral calls lies within the third party's authority, answer based on the governance arrangements of that third party
• if the typical size of the scheme's routine collateral calls lies beyond the third party's authority, answer based on the trustees' governance arrangements

Efficient governance of transactions

Questions

Delegation to LDI manager to sell assets

Over what proportion of the assets (that the trustees envisage selling in response to an LDI manager’s collateral call) have the trustees delegated unlimited authority to a third-party to sell?

We ask you to make a selection between all, some or none of the assets.

If the trustees would not need to sign any paperwork to sell the assets concerned - for example, because the LDI manager or a fiduciary manager has full authority to do so - select ‘All of the scheme assets’.

Do the trustees have a single authorised signatory list or multiple authorised signatory lists?

We ask about the signatory arrangements with the scheme’s investment managers. We are not concerned with the scheme administrator’s signatory arrangements for making payments from the scheme’s bank accounts.

We ask whether the scheme has 'single' or 'multiple' signatory lists across the investment managers.

We wish to know about the number of different individuals across the managers' signatory lists, even if some have different levels of signing authority.

A 'single' list means that the signatory list for each of the managers comprises the same individuals, even if their signing authority is different across the different managers.

'Multiple' lists mean that the signatory lists for each of the scheme's investment managers comprise different individuals.

Here are two examples, assuming we have six trustees named A, B, C, D, E, and F, and two managers named No1 and No2:

In the first example, No1's manager's list is A, B, C, and D, any two to sign - No2's manager's list is A, B, C, and D, where one of A or B and one of C or D need to sign. This is a single list because the individuals are the same even though the signing authorities are different.

By contrast, in the second example, No1's manager's list is A, B, C, and D, any two to sign. No2's manager's list is C, D, E, and F, any two to sign. These are multiple lists because the individuals concerned are different.

When indicating whether you have a single authorised signatory list or multiple authorised signatory lists, answer ‘Single’ if you have just one set of names common to all the managers concerned.

How many individuals are listed as authorised signatories?

You will be asked this question if your previous answer was ‘Single’.

Enter the number of different individuals on the list, even if some have different levels of signing authority.

How many individuals are listed as authorised signatories on the list with the fewest number of authorised signatories?

You will be asked this question if your previous answer was ‘Multiple’.

Enter the number of different individuals on the list, even if some have different levels of signing authority.

Systemic liquidity impacts

Questions

Do the trustees have a pre-agreed plan of asset sales from which to source the required moneys?

This refers to a pre-agreed plan of asset sales – a ‘liquidity waterfall’ – to which you would refer in the event of a routine collateral call of the type described in previous questions to determine which assets to sell, in which order, to meet the call.

If the trustees' pre-agreed plan consists solely of using money market or cash funds to source the required moneys, please answer 'No'.

Which asset class is on the first step of the waterfall?

You will be asked this question if your answer to the previous question was ‘Yes’.

Disregard any cash or money-market funds in the waterfall. Do not enter them under 'other'.

'Credit facility' means a formal loan arrangement for the scheme to borrow cash rather than selling assets. One example of this could be with the scheme sponsor.

If more than one asset class appears on the first step of the waterfall, input the largest of these. If two or more asset classes are equally large, input whichever appears first on our list.

Which is the scheme's largest holding in a liquid asset class?

You will be asked this question if your answer to the previous question was ‘No’.

Disregard any cash or money-market funds in the waterfall. Do not enter them under ‘other’.

‘Credit facility’ means a formal loan arrangement for the scheme to borrow cash rather than selling assets. One example of this could be with the scheme sponsor.

If your scheme has a credit facility, assess whether it is the ‘largest holding’ by comparing the maximum amount it could borrow with the amount of the scheme’s different asset classes.

Is the asset class from which the trustees would source the required moneys (from a request from an LDI manager) accessed by a pooled fund?

You will be asked this question if the answer to either of the previous questions was ‘Bonds’, Equity, Property or Diversified growth funds.

What are the names of the asset manager and pooled fund?

Does the scheme's LDI manager have authority to disinvest from the relevant asset class without direct intervention from the trustees?

For the purposes of this question, disregard any authority given to sell money market or cash funds.

If the LDI manager's discretion to disinvest is limited in any way, select 'No'.

When was a legal review last carried out on the credit facility?

Read our guidance on using liquidity and leverage. It states that trustees should make sure any credit facility is reviewed legally to ensure it will be available when it is needed.