TPR issues guidance after NCA statement on LDI funds

Statement from key EEA regulators sets clear expectations for resilience of LDI portfolios

Jonathan Stapleton
clock • 2 min read
Charles Counsell: Ensuring scheme buffers are sufficient to cover a swift and substantial increase in yields
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Charles Counsell: Ensuring scheme buffers are sufficient to cover a swift and substantial increase in yields

The Pensions Regulator (TPR) has welcomed statements made today (30 November) by the Central Bank of Ireland and the Commission de Surveillance du Secteur Financier in Luxembourg on the resilience of liability-driven investment (LDI) funds.

The two bodies are the national competent authorities (NCAs) for the funds industry in Ireland and Luxembourg - two of the key countries where LDI providers and funds are based and regulated. 

In response to the NCA statement, TPR has issued its own guidance statement calling on scheme trustees who use LDI to maintain an appropriate level of resilience in leveraged arrangements to better withstand a fast and significant rise in bond yields. The statement also calls on trustees investing in leveraged LDI to improve their scheme's operational governance.

TPR chief executive Charles Counsell said: "LDI funds are regulated in the country their provider is based and, in most cases, these are EEA countries. We are very pleased therefore to see these joint statements from regulators in Ireland and Luxembourg setting clear expectations for the resilience of LDI portfolios.

"Accordingly, we have now issued a guidance statement for trustees and advisers confirming our expectations for the use of LDI funds. I urge trustees to read the statement and consider how they can meet the steps it outlines to ensure their scheme buffer is sufficient to cover a swift and substantial increase in yields at the level set by the NCAs."

Counsell added: "We continue to work closely with other regulators to ensure we learn from the challenges we have seen in recent weeks."

The TPR guidance can be read in full here.

Lane Clark & Peacock (LCP) said the TPR guidance effectively re-affirms the need to maintain the higher levels of buffers against yield rises that have been put in place since the start of October 2022 - a higher level of buffer than has been typical in the past.

It said the yield rise level buffers discussed are in line with what it had seen the main LDI investment managers adopt and implement since early October - meaning the vast majority of schemes are unlikely to need to make immediate changes to investment strategies in order to fit with the new expectations.

But it said that, given the outplay of systemic risk at the end of September and during October, this "regulatory line in the sand" was helpful, to avoid a creeping up of leverage levels over time as managers compete.

LCP investment partner Dan Mikulskis said: "We are pleased to see this joined up guidance from regulators on their expectations for the buffers that should be used to support LDI going forwards.  This central steer should help materially reduce systemic risk, and enable schemes to focus on now developing a longer term investment strategy that works for them."

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