Top marks for the Pensions Regulator (TPR) whose efforts to improve resilience in the UK pension funds’ liability-driven investment (LDI) strategies received glowing commendations from the Bank of England in its March report.
Minutes of the Financial Policy Committee (FPC) meeting published on 27 March welcome the “continued progress in the implementation of the resilience standard the FPC recommended for LDI funds, and several steps had been taken by authorities to ensure that it would be met on an ongoing basis”.
The FPC observed that this resilience standard – brought in following recommendations from the BoE – was continuing to function well, with funds maintaining higher levels of resilience compared with prior to what it calls “the LDI episode” in September 2022.
The FPC says that areas for improvement it had identified in its October 2023 Record, including slow recapitalisation periods by some LDI managers, were being addressed via collaboration between domestic and international authorities.
Acknowledging the FPC’s positive assessment of the regulator’s work, Nausicaa Delfas, TPR Chief Executive, says: “We welcome the FPC’s recent announcement recognising the progress TPR has made in response to its recommendations on making the leveraged LDI market more resilient to gilt market shocks.”
The BoE also praised the work of the Financial Conduct Authority (FCA) in its efforts to “enhance market integrity and promote effective competition” and welcomed the December 2023 consultation on improving transparency for bond and derivatives markets.
However, the FPC added that an appropriately calibrated transparency regime would support UK financial stability.
“From a financial stability perspective there was a need to balance the potential benefits from better and more timely transparency with potential costs to market liquidity. For example, proposals which aimed to increase transparency should ensure that they do not significantly harm the ability of market participants, such as dealers, to offer liquidity in larger sizes due to them not being given adequate time to hedge their positions,” The FPC said.
The FPC also wants to see more transparency to support UK financial stability by helping to increase both the number of participants and their trading volumes, supporting market liquidity in normal and stressed conditions and through providing market participants with the information necessary to improve their liquidity risk management.
“This would enable market participants to better estimate market depth and the cost of unwinding their positions, improving their ability to manage liquidity risks, which is first and foremost their responsibility. This in turn could reduce the risk of demand for liquidity, including that from non-bank financial institutions, rising unduly in stress,” the FPC says.
The FPC TPR and FCA say they will continue to work together “to ensure any risks to financial stability in the pensions sector are reduced”.
