BofE shares update on work following gilt market volatility

The Bank of England (BofE) has confirmed that it is working with relevant regulators to address data gaps and ensure the resilience of liability-driven investment (LDI) funds, given the "clear systemic impact of their forced asset sales during the September 2022 stress".

Responding to a letter from Work and Pensions Committee (WPC) chair, Stephen Timms, BofE executive director for financial stability, strategy and risk, Sarah Breeden, provided an update on the work that the Financial Policy Committee (FPC) has done following the issues surrounding LDI in autumn 2022.

In particular, she confirmed that the FPC is considering what a steady state resilience standard should look like and is working with regulators to ensure data gaps are addressed and resilience maintained in LDI funds.

"Improving data and closing data gaps is a key aspect of the regulatory response to the LDI episode and will be important in monitoring and enforcing steady state resilience," she stated. "The Pensions Regulator and other regulators have started work on expanding their data collection with a view to closing existing data gaps.

"In determining what additional data will need to be collected as part of steady state resilience, the benefits of additional data will need to be balanced against the burden to schemes and funds in providing this data, which can often be resource intensive (especially for smaller schemes)."

Breeden also addressed queries around the BofE's £3.8bn profit on the sale of gilts purchased during its temporary programme, and whether pension schemes must have lost by a commensurate amount.

Despite previous speculation, Breeden clarified that there is "no direct read across” from the BofE's profits to any losses for pension schemes, noting that there were "many active participants" in the gilt market other than the BofE and pension schemes, meaning not all gilts bought by the BofE were sold by pension schemes, and not all gilts sold by pension schemes were bought by the BofE.

"The Bank’s profits will also only capture changes to the valuation of the asset side of pension scheme’s balance sheets, and so will not capture changes in the value of their liabilities during this period," she stated.

"Because of the impacts on the value of liabilities, the increase in gilt yields in this period actually improved DB pension schemes’ overall funding positions, and reduced deficits."

Timms had also queried whether pledging assets, so that schemes do not ned to sell them to meet collateral calls, could be an option in the future, and what steps are being considered if so.

Commenting in response, Breeden noted that many schemes and LDI funds do already use repo to borrow at present, and the FPC is currently considering the range of liquidity options including repo that might best support steady state resilience.

However, she warned that many schemes lack the operational and legal infrastructure to enter into this market, and it can be expensive and resource intensive to set up, particularly for smaller schemes.

"In addition, repo is not always accessible in practice in stressed markets, and firms may have limited collateral to draw upon quickly in a stress," she continued.

"These factors may form a barrier to repo being more widely used across the market, and its potential to be used as a tool in stress, so any benefits of encouraging repo as a liquidity tool would need to be balanced against these costs.

"More broadly, the FPC is working with relevant regulators to consider a range of options to ensure the resilience of LDI funds given the clear systemic impact of their forced asset sales during the September 2022 stress."

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