UK government officials said on Wednesday that the Bank of England’s tougher regulations for liability-driven investment (LDI) funds expected next week must combine resilience and usefulness.
LDI funds, used by pension plans to link assets with payouts, were hit by a drop in UK government bond prices, leaving several smaller and pooled systems unable to make collateral calls.
The Bank of England revived bond prices.
On Wednesday, the Bank’s Financial Policy Committee will propose a “steady state” cash buffer structure for fund managers, data reporting, and governance enhancements.
On Wednesday, British parliamentarians questioned whether pension systems could use LDI money, and pensions minister Laura Trott agreed that lessons must be learned.
“LDI still has a valuable role I feel in the total investment alternatives accessible to pension systems,” Trott told a parliamentary committee.
Trott recommended mandatory fund data reporting.
Last September, gilt yields rose 160 basis points, although Dublin and Luxembourg-listed LDI funds had cash buffers that could handle a 100 basis point shift in interest rates.
Industry executives fear that LDI financing might become unviable for some schemes if buffers were permanently maintained at high levels.
“We must avoid overburdening lesser finances. Longer term, consolidation is crucial “Trott.
City minister Andrew Griffith said banning LDI funds would not strike the proper regulatory balance to allow pension systems to function.
“Underperformance is a concern,” Griffith added.
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