“Leveraged LDI: Prudent deficit risk management or ultra vires speculation?” is the title of a paper prepared by Philip Bennett, the Law School’s first Professor in Practice, for the Association of Pension Lawyers Summer Conference in June 2023.
It builds on the analysis on this topic in Philip’s co-authored article which appeared in the April issue of Butterworth’s Journal of International Banking and Finance Law.
The paper examines whether, on a correct construction, the regulations which restrict borrowing and the use of derivatives by DB pension fund trustees (and their fund managers) prohibit leveraged LDI strategies.
It concludes that those regulations do, indeed, render the use of more than £60 billion of repos and of interest rate swaps based on a total notional principal amount of in excess of £200 billion by those trustees and managers for the purpose of implementing a leveraged LDI investment strategy outside the powers (ie ultra vires) of those trustees and managers.
It also concludes that such strategies are no more than a speculation or carry trade on long/short interest rates which is proving extremely costly now that base rate has increased from 0.5% at the start of February 2022 to 5% on 22 June 2023.
It draws out the parallels with the local authority interest rate swap speculation (Hazell v Hammersmith and Fulham London Borough Council) which was held to be ultra vires in 1991.
It notes that, like the local authority interest rate swaps, it is unlikely that those providing legal opinions as to the validity of the leveraged LDI strategies were made aware of the full picture.
A copy of the paper is available here: Leveraged LDI - Prudent deficit risk manage or ultra vires speculation
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