DB schemes considering legal claims against LDI managers face hard road

The government's Mini Budget on 23 September last year led to a substantial spike in gilt yields - a rise that led to schemes facing unexpectedly large collateral calls in a short period of time, with some experiencing substantial losses in the turmoil.

But despite a number of schemes facing losses as a result of the crisis, lawyers say claiming compensation from LDI managers and consultants will be challenging.

Arc Pensions Law senior partner Anna Rogers explained: "Some schemes did crystallise losses in the LDI turmoil and for them it has to be worth looking at their contracts, but I doubt there is an easy road to recovering any meaningful compensation.

"Even if there are trustee-friendly clauses, asset managers and investment consultants are going to have defences. This is going to take a long time to play out."

Trustee understanding

In a Professional Pensions outlook article published yesterday (9 January) Burges Salmon litigation partner Suzanne Padmore agreed the trustees of schemes who fared worst from the crisis will likely be considering whether they could be in line for a claim but noted it would be complex.

She said: "Where a scheme's hedging position was not what it was understood to be, the question for these schemes is whether the level of the hedge was managed and if so, how effective was that management during 2022?

"Where hedge levels had drifted, there may be scope for claims if, as 2022 wore on, that approach presented a level of risk not properly understood or accepted by trustees."

Padmore said schemes which invested in pooled LDI funds may also have suffered, as some pooled funds did not accept cash to meet collateral calls.

She said: "Some are rumoured not to have had the resource to process the calls, whereas others may have taken that approach believing that treating all investors in the same way would be fairer than a fragmented approach."

The devil is in the detail

Writing for PP in December, Stephenson Harwood pensions managing associate Chris Edwards-Earl said he believes the potential claims arising would depend on the advice provided and contracts in place.

He said, for many schemes, potential claims may have arisen from the investment manager taking urgent action during the crisis to raise cash in a so-called firesale which, unfortunately, may have caused the scheme losses.

Edwards-Earl explained: "In order to challenge those actions, trustees could argue that the specific trades to raise collateral were inappropriate. The success of such a claim would depend on what the scheme's position was at the time, and what options and assets were in fact available to the investment managers."

He added that, what the investment managers were required to do under their contract may well be a different question to what they ought to have done, with the benefit of hindsight - and indeed whether another reasonably competent investment manager in their position would have done what they did.

Edwards-Earl added the situation would be made even more complex as there were likely to have been various investment consultants and asset managers involved - noting that how they liaised with each other and the extent to which they were required to liaise would be important.

He said: "Where the investment manager was simply exercising discretion available to them, in difficult circumstances and seeking to avoid defaults, they may have a good defence.

"The devil will be in the detail of such cases - and significant sums could turn on such detail. The strongest of such claims will always be where the investment managers failed to follow instructions provided, adhere to their contracts, or apply mandates issued to them."

The key legal issues for pension schemes in 2023

Who is to blame for the LDI crisis and where are the possible claims