Systemic Pensions: The Epistemic Politics of Liability-Driven Investment Strategies

This paper examines the increasing use of leverage in the pension system and explains the limited regulatory response to growing concerns about the implications for financial stability. Our argument is illustrated by analysing the proliferation of liability-driven investment (LDI) strategies in UK defined-benefit pension schemes and the emergence of systemic risk as a regulatory issue. The paper draws on the linked ecologies framework to map how different professional groups assert control over new issues through knowledge production. We attribute the rise of LDI strategies after 2007 to the ability of investment consultants to mediate or arbitrage between pension funds and pension regulators through the development of hinge strategies around derisking and leverage. Next, we explain how the systemic risk of LDI developed as an emergent issue in the gaps or ‘blind spots’ between existing pools of professional knowledge. We argue that regulators’ ability to mitigate these risks was constrained by epistemic pathologies, grounded in professional practices and reputational concerns, which inhibited the co-production of new actionable knowledge. The paper contributes to the development of new epistemic perspectives on pension financialisation and extends important work on macroprudential regulation to a hitherto neglected part of the financial system.