Watchdog calls for tougher tests on UK pension funds
Watchdog calls for tougher tests on UK pension funds in the wake of the mini budget LDI crisis
The financial watchdog has called on liability driven investment (LDI) funds to urgently introduce new stress tests and improve their risk management after chaos in the sector last year.
Fresh guidance has been a long time coming for the industry, which was plunged into disarray in September in the wake of then Chancellor Kwasi Kwarteng’s mini-Budget.
Last month the Bank of England set out policy recommendations to bolster LDI buffers and yesterday, the Financial Conduct Authority and the Pensions Regulator finally began fleshing these out.
Disarray: The industry was plunged into disarray in September in the wake of then Chancellor Kwasi Kwarteng’s (pictured) mini-Budget
The FCA said stress tests and related contingency plans should consider a plethora of scenarios, ranging from a change to prices or liquidity for assets or even system failures or cyber attacks.
LDI strategies were designed to help pension funds reduce funding volatility. But schemes were forced to dump tens of billions of pounds of government bonds within days to meet demands for cash from LDI managers.
The fire sale threatened to destabilise the UK’s financial system after gilt yields jumped sharply in response to the Government’s disastrous mini-Budget.
Deficiencies exposed during the near-meltdown included the management of multiple risks in LDI funds, including stress testing and scenario planning, communications and client servicing, said the FCA.
‘Cumulatively, these contributed to the market dysfunction and the consequent threat to financial stability,’ it added.
Sarah Pritchard, executive director for markets at the FCA, said asset managers ‘must take the necessary steps’ so that their LDI portfolios are resilient to future market volatility.
The Pensions Regulator (TPR) also published guidance yesterday. It said it wanted to stress the importance of ‘having the right governance and controls in place to reduce risks’ to schemes. Fund managers must be able to ‘react to events quickly’, it added.
