XPS responds to Bank of England announcement on LDI

XPS responds to Bank of England announcement on LDI

29 Mar 2023

The Bank of England’s Financial Policy Committee has today announced that the Pensions Regulator (TPR) is recommended to specify “minimum levels of resilience” in relation to pension schemes’ investments in LDI to avoid detrimental feedback loops from the fire sale of assets.

The stated level of resilience is to absorb a gilt yield increase of at least 2.5%. This is lower than the 3% minimum referenced in TPR’s guidance issued in November 2022, although the detail of the framework will be developed in conjunction with other regulators including the FCA and offshore pooled fund regulators.

Simeon Willis, Chief Investment Officer at XPS commented: “We have been expecting further developments in relation to management of liability driven investments and this announcement doesn’t come as a surprise.  The minimum level of resilience is lower than most pension schemes have been working to and as such this shouldn’t cause any issues for schemes whose funds were already in alignment with guidance.  What we now know is that the regulator will be specifying what is acceptable, rather than simply letting schemes and their underlying fund managers decide that for themselves. This reflects the systemic risk that pension scheme represent to the wider gilts market.”

The Committee also recommends that TPR’s remit be expanded to include an objective around wider financial stability and for this to be equally weighted with its other objectives.

Willis added: “A change in remit could lead to a very significant change to TPR’s approach in relation to a number of aspects reaching well beyond LDI.”