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This case study explains our LDI strategy and how we dealt with the interest rates rising sharply in September 2022. 

The liability side of the PPF balance sheet reflects the value of payments we expect to make in the future to current scheme members. Changes to interest rates and inflation affect the valuation of those future payments.

Our LDI strategy helps us to control the impact of these changes on our reserves through investing in assets that will behave in the same way as our liabilities: things like UK Government bonds (known as gilts) that go up and down in value as interest rates change. 

Like most LDI strategies, we use leverage to balance managing our interest rate sensitivity whilst continuing to invest in return-seeking assets like equities that allow us to grow the size of our reserves. When interest rates rose sharply in September 2022, we had to move assets totalling £1.6 billion quickly to meet collateral calls. This was not a problem for us, as we keep lots of suitable assets available for exactly this purpose.

The situation was, however, more challenging for some pension schemes, which had to sell investments to raise money to put into their LDI strategies. Some had to sell their LDI assets. This selling created a cycle of increasing interest rates and the selling of LDI assets. In order to break the cycle, the Bank of England bought UK gilts on a temporary basis, and, by November, market interest rates had largely fallen back to where they were before September. 

The direct impact of the situation on the PPF was limited. We were never in any danger of being forced to sell any of our assets and could have weathered further substantial rises in interest rates, and our reserves remained steady. This outcome is a validation of our decision to manage our LDI strategy in-house, which meant we had a real-time view of our position and were able to react very quickly as conditions changed.

We also have an excellent in-house investment operations team, who oversaw the timely transfer of the extra security we had to pledge, and made sure that the information we had about our portfolio was up to date at all times.