Strengthening Our investment Escalation Message from Key highlights our stewardship Our progress Our purpose approach and Our approach and exercising Our aspirations for 22 Pension Protection Fund Responsible Investment Report 2022/23 our Chair of the year commitment at a glance and governance incorporating ESG to engagement shareholder rights the coming year Appendices OUR APPROACH TO ENGAGEMENT CONTINUED Engagement approach for assets CASE STUDY we manage internally Sharing best practice on leveraged LDI As explained earlier, we manage approximately half of our assets by value internally, all of which are in various Most pension schemes use a leveraged LDI strategy This outcome is a validation of our decision to manage types of 昀椀xed income. Industry-wide, engagement with that allows them to o昀昀set the interest-rate exposure of our LDI strategy in-house, which meant we had a real- 昀椀xed-income issuers is at an early stage of development, their liabilities while still being able to invest in return- time view of our position and were able to react very partly due to investors’ limited in昀氀uence in many areas. generating growth assets. The downside of using a quickly as conditions changed. We also have an excellent However, engagement is developing and its importance leveraged strategy is when yields rise, pension schemes in-house investment operations team, who oversaw the is becoming increasingly appreciated. We take a variety have to 昀椀nd additional assets to post as margin. timely transfer of the extra security we had to pledge, of approaches to engagement in this area, largely and made sure that the information we had about our depending on the size of our investment, maturity of the In the summer/autumn of 2022, yields rose rapidly and portfolio was up to date at all times. 昀椀xed-income asset and whether the issuer is corporate some pension schemes found they were running short or sovereign/quasi-sovereign. of assets that they could post as margin, and were faced As a result of our handling of the market crisis and with a choice of being forced sellers of other assets to deep understanding of the market, the PPF LDI team Engagement options for raise cash or lose their leveraged LDI exposure. This made itself available to regulators and other bodies to internally-managed assets episode highlighted the importance of having a level of educate and inform trustees about what we consider leverage, overall investment strategy/asset allocation, and best-practice governance, and how decisions around Engaging via Engaging Engaging via governance process that are mutually supportive – and investment strategy/use of leverage/governance need EOS directly collaborations a process that allows decisions to be made in a timely to be interlinked. & networks manner with clarity around responsibilities. The interaction our LDI team had with the market on The direct impact of the situation on the PPF was limited. the LDI crisis included: We were never in any danger of being forced to sell any of • engagement with the Bank of England and The our assets and could have weathered further substantial Pensions Regulator to provide market intelligence to rises in interest rates, and our reserves remained steady. help them be better informed in their responses, and to o昀昀er quick feedback on their interventions; Issuers • engagement with the UK DMO to assist in understanding the impact of the changing market environment on how it can fund the government’s Engagement in our UK LDI assets annual borrowing requirement; One of our aims is to improve the e昀케ciency and • gave evidence to the UK Parliament Work & Pensions functioning of markets through collaboration with Select Committee, providing details of how the PPF stakeholders and policymakers on important issues. As a manages leverage in our LDI strategy and what we major participant in the UK Government Gilt market within consider best practice; our LDI assets, we regularly engage with the UK Debt • spoke at a virtual industry event (Pension Playpen Management O昀케ce (DMO) and HM Treasury on a range webcast) while the market turmoil was still playing out of issues. This involves taking part in annual consultations, to help inform trustees as to what we think best practice forums and investor roundtables. For example, during in governance of leveraged strategies looks like; the LDI crisis in autumn 2022, we engaged closely with • spoke on a panel at the Pensions and Lifetime Savings government, regulators and other bodies to share our Association (PLSA) conference, again on the theme perspective on managing leveraged LDI e昀昀ectively – of the interrelatedness of leverage management, see opposite. investment strategy and governance; and • engaged with 昀椀nancial and pensions media to ensure broader public understanding of the dynamics of LDI mandates and their impact on the Gilts market. Outcome: The PPF welcomed the opportunity to share our perspectives and practices on managing an LDI portfolio e昀昀ectively. Earlier this year the Bank of England published a paper outlining minimum levels of resilience expected of LDI funds.