FOI reference - FOI-67
Date - 13 February 2023
Request
You have requested the following information:
- Copies of communications and minutes of meetings at high level, when TPR apprised government, the BoE or fund managers, of risks arising from LDI use.
- Copies of proposals made by TPR, to contain those risks.
- Details of actions taken by TPR and Pension Funds, to monitor the effectiveness of the risk reduction measures and make appropriate improvements.
- Bearing in mind that the PPF (Pension Protection Fund) also had an LDI risk exposure, details of risk reduction measures proposed to and taken by, the PPF.
- Details of losses sustained by UK pension funds due to the bond sell off, during the market turbulence, what order of impact that is likely to have on pension values.
- How the funds are expected to compensate their members, if a fund is found to have used LDls without due care?
Response
I can confirm that we hold information falling within scope of your request/the information you have requested. However, we are unable to supply some of the information requested for the reasons set out below.
Information we are able to supply
v) How the funds are expected to compensate their members, if a fund is found to have used LDls without due care?
Pension schemes are obliged to fulfil their obligations to their members by providing them with their promised benefits. Where a pension scheme’s assets are deemed insufficient to fulfil such obligations, the sponsoring employer is ultimately responsible for covering such shortfalls. Where a sponsoring employer is unable to (in particular, where the sponsoring employer is no longer a going concern), the Pension Protection Fund provides protection to members of DB pension schemes – up to a certain limit.
Pension scheme trustees are obliged to act in the best interest of their members (these are fiduciary duties in common law, but also see s.1, 2, and 36, and schedule 1 of the Trustee Act 2006, and the Code of Practice 13 at paragraph 44) - and to take advice from a suitably qualified adviser when making investment decisions under Section 36 of the Pensions Act 1995. Where trustees fail to follow these obligations they are liable for enforcement action, details of which can be found in our Compliance and Enforcement Policy.
Information we are not able to supply
i) Copies of communications and minutes of meetings at high level, when TPR apprised government, the BoE or fund managers, of risks arising from LDI use.
Section 29 - Prejudice the economic interests of the UK
Section 29 of the Freedom of Information Act (FoIA) allows a public authority to refuse a request if disclosure would be likely to prejudice:
- the economic interests of the UK or any part of it, or
- the financial interests of any administration in the UK
Prejudice Test
Exemptions under Section 29 are subject to a prejudice test. This means that the authority has to satisfy itself that the prejudice or harm relates to either the economic interests of the UK or any part of it, or the financial interests of a UK administration. The application of this test is provided for in the Information Commissioner's Office (ICO) guidance ‘The economy (section 29)’, see paragraphs 24 to 27 in particular.
The release of minutes or communications could lead to concern that the Bank of England and/or the government will not be able to carry out responses to financial stability incidents in confidence going forward. This could negatively impact future contingency planning if firms are unwilling to share information with the government for fear that it will be subsequently become public thereby posing a risk to financial stability, and by extension to the wider economy.
Public Interest in disclosure
The public has a right to know how public bodies discuss issues that affect the economy, in this instance the risks surrounding LDI. The release of the information could lead to greater transparency and accountability in high level matters. Furthermore, the release of the information could lead to greater public understanding of the government’s economic policies and decisions.
Public interest in maintaining the exemption
Minutes and communications at high level includes information that would reveal sensitive economic data or information about financial markets. Where disclosure would result in financial instability of institutions or countries, either in the UK or abroad which would harm the economic interests of the UK or the financial interests of any administration within it. Furthermore, by releasing this information, it would harm the economic interests of the UK, by revealing sensitive information that could be used to gain an unfair advantage in trade negotiations, by revealing sensitive data that could impact the financial markets, or by revealing information that could compromise the UK’s economic stability.
Conclusion of public interest test
TPR acknowledges that with the recent instability in the markets there is a heightened interest in how, and what the government does to oversee the financial industry and financial institutions to ensure the turbulence of recent months isn’t repeated. However, there is a strong countervailing public interest not disclosing information to the public that could lead to the very instability in the markets which is in the public interest to avoid. Whilst there are public interest considerations in favour of disclosure, there is also a strong competing argument for maintaining the exemption and why the information is exempt from disclosure.
The arguments in favour of disclosure of the information requested have weight, but that, in our view, is outweighed by the very strong competing public interest in the Regulator’s ability to protect the benefits of members of occupational pension schemes and reduce the risk of situations arising which may lead to compensation being payable from the PPF. The disclosure of information would likely have a detrimental impact on confidence in the pension landscape and LDI in general, negatively impacting on the ability to manage confidence in the wider financial markets. Therefore, disclosure of this information would likely prejudice the economic interests of the UK or any part of it, or the financial interests of any administration in the UK.
As highlighted in the response to part (ii) and (iii) of your request, our Annual Funding Statement 2023 will be an opportunity for us to further clarify our stance, based on observations of our regulated community’s reaction and consequent behaviour. Our conclusion in relation to the information within scope of part (i) of your request is that the public interest in disclosure is outweighed by the public interest in non-disclosure and maintaining the exemption at section 29 of the FoIA.
Section 44 – Prohibitions on Disclosure
We consider parts of the information to be exempt from disclosure under section 44(1)(a) of the FoIA. As we have been given strong powers to demand documents and other information from trustees, employers and others, those powers are also balanced by restrictions on how we disclose the information provided to us. Parts of information you have requested is ‘restricted information’. Restricted information is defined at section 82(4) of the Pensions Act 2004 (PA04) as: ‘information obtained by the Regulator in the exercise of its functions which relates to the business or other affairs of any person’.
Under section 82(5) of the PA04 it is a criminal offence to disclose such information except as permitted under that Act.
Whilst the FoIA is based on the presumption of releasing information, section 44(1)(a) of the FoIA provides an absolute exemption to the requirement to disclose any information if its disclosure is prohibited by or under any enactment. In this case, section 82 of the PA04 prohibits disclosure and we are unable to disclose the requested information. This exemption is absolute and does not require a public interest assessment be undertaken.
Section 36 – Effective conduct of public affairs
We would also like to advise that some of the information requested may become exempt from disclosure under section 36 of the FoIA. If and when this occurs, we will seek to update you with how the use of this exemption has impacted on your Freedom of Information request.
ii) Copies of proposals made by TPR, to contain those risks.
And
iii) Details of actions taken by TPR and Pension Funds, to monitor the effectiveness of the risk reduction measures and make appropriate improvements.
Section 21 - Information reasonably accessible to the applicant by other means
Where information is already available in the public domain, there is an exemption under section 21 of the FoIA which provides there is no right of access to information via a Freedom of Information request where the information is available by another route. This exemption has been considered and implemented for parts ii) and iii) of your request.
Further information on this guidance can be found on the ICO website.
In 2019, we produced a leverage and liquidity study with the Bank of England (National Archives) to gain a clearer picture of industry behaviour and this has informed how we assess and alert trustees to risk. When TPR identifies a risk to our regulated community, we typically include it in our communications directed at the community. This is to make sure that these risks are factored into the way trustees operate pension schemes in line with their regulatory obligations. These communications are all public and available on our website.
TPR’s latest Annual Funding Statement 2022 explicitly states that liquidity, specifically in reference to geared hedging (ie, leveraged LDI) and margin calls, is one of many risks that trustees should actively manage.
Following the unprecedented gilt market behaviour of late September 2022, TPR issued further guidance – all of which is in the public domain – to its regulated community. The first was on 12 October, followed by additional guidance on 30 November.
Our Annual Funding Statement 2023 – due to be published in Spring 2023 – will be an opportunity for us to further clarify our stance, based on observations of our regulated community’s reaction and consequent behaviour following the aforementioned updates.
Information Not Held
iv) Bearing in mind that the PPF (Pension Protection Fund) also had an LDI risk exposure, details of risk reduction measures proposed to and taken by, the PPF.
There are two aspects to this question, being what risk reduction measures were proposed by The Pensions Regulator to the PPF for LDI risk. The second question being what risk reduction measures were taken by the PPF for LDI Risk.
Regarding the first part of the question, the PPF would have had sight of our public facing documents published online that are already detailed in this letter which reference such risk exposure. TPR does not hold records of any direct advice to the PPF on this point.
As for the second question, The Pensions Regulator does not hold information as to what risk reduction measures were taken by the PPF. This part of your request may be better answered by the Pension Protection Fund and the PPF FoIA team. However, we cannot confirm if the PPF has the information you have requested.
iv) Details of losses sustained by UK pension funds due to the bond sell off, during the market turbulence, what order of impact that is likely to have on pension values.
TPR does not collect this data. However, the PPF produces a monthly estimated aggregate value of the funding position of all DB pension schemes eligible for PPF protection, known as the PPF 7800 Index (PPF website). Please note this estimate is based on a particular approach to valuing a schemes’ liabilities; there are many valid ways of valuing liabilities.
We note that asset values and liability values change based on market conditions. If the two move together (ie, assets fall when liabilities fall, and vice versa) then pension schemes’ ability to fulfil their obligations to their members is protected.