The Bank of England (BoE) has recommended that The Pensions Regulator (TPR), in co-ordination with the Financial Conduct Authority (FCA) and overseas regulators, takes regulatory action to ensure liability-driven investment (LDI) funds remain resilient.

In its Financial Stability Report, the BoE’s Financial Policy Committee (FPC) called for regulatory action as an interim measure to improve LDI funds’ resilience to the higher level of interest rates that they can now withstand, and defined benefit (DB) pension trustees and advisers ensure these levels are met in their LDI arrangements.

Following this, the FPC said that regulators should set out appropriate steady-state minimum levels of resilience for LDI funds, including on operational and governance processes, and risks associated with different fund structures and market concentration.

Additionally, the FPC called for further steps to be taken to ensure regulatory and supervisory gaps are filled, in order to strengthen the resilience of the sector.

It welcomed TPR’s recent guidance as a first step on maintaining financial and operational resilience, and welcomed the recent statements by the FCA and overseas regulators on the resilience on LDI funds.

“This episode demonstrated that levels of resilience across LDI funds to the speed and scale of moves in gilt yields were insufficient, and that buffers were too low and less usable in practice than expected, particularly given the concentrated nature of the positions held in the long-dated gilt market,” the report stated.

“While it might not be reasonable to expect market participants to insure against the most extreme market outcomes, it is important that shortcomings are identified and action taken to ensure financial stability risks can be avoided in future.

“There is a clear need for urgent and robust measures to fill regulatory and supervisory gaps to reduce risks to UK financial stability, and to improve governance and investor understanding.”

Speaking at a hearing at the Work and Pensions Committee and commenting in response to the FPC’s recommendation, TPR chief executive, Charles Counsell, said: “We welcome the statement that the FPC made.

“What we have done is put in measures that are resilient for now, but we need to think about what the longer-term measures might be.

“Our intent is therefore to look at what those measures might be and our intent is to do that via a funding statement in April of next year.

“What we need to look at longer term is what happens if interest rates go up, if interest rates go down, and what levels of collateral should be in place. So, we will be looking a those medium- to longer-term implications.”

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