TPR and FCA provide update on LDI work following market volatility

The Pensions Regulator (TPR) and the Financial Conduct Authority (FCA) have confirmed that work is underway following the recent issues around liability driven investment (LDI), including work to improve data gathering.

In an evidence hearing with the Industry and Regulators Committee, TPR chief executive, Charles Counsell, suggested that there is work to be done "for all of us", noting that around 60 per cent of pension schemes have invested in LDIs in one form.

In particular, Counsell confirmed that the immediate work will focus on the degree to which there is sufficient collateral to support shocks such as those recently seen amid the gilt market turmoil.

"We are working alongside the FCA to consider whether we should make a statement to LDI funds and pension schemes that operate segregated arrangements about the level of collateral they we expect them to keep," he stated.

"This would mean there is a stronger buffer in place in the event of sharp bond yield movements than there was before this event happened."

In addition to this, Counsell acknowledged that, on reflection, TPR "didn’t have as much data on this as perhaps we would like to have", clarifying that improvements in this area have been an ongoing focus for the regulator in recent years.

Indeed, Counsell highlighted a consultation run alongside the Pension Protection Fund (PPF) in 2021, which looked at asset breakdown in more detail then ever before, confirming that the findings from this will be shared during the course of 2023.

"We will look to see whether we need to go further in terms of data collection to ensure that together we can work on systemic risks," he explained.

This was echoed by FCA chief executive, Nikhil Rathi, who agreed that there is a "huge amount of work around data reporting and data gathering", alongside the need for international collaboration, given the global nature of many of the products involved.

In addition to this, Rathi reiterated concerns around the regulation of investment consultants and the need for regulatory changes in the non-bank sector, arguing that "not all parts of the system performed as we would have wanted them too".

“There were clearly gaps in capability and competence in some of the investors, there were clearly gaps in the investment consultants, and we do think they should be regulated, which they are not at the moment," he continued.

"Some of the custodians were struggling through manual processing with the volume of transactions, so all of these are things we want to take forward for the future, while recognising that what happened in terms of the scale and speed was extraordinary."

However, Rathi clarified that the extension of the FCA’s remit is a decision for government, pointing out that there are questions about the appropriateness of spending FCA money on an activity which it has not been asked to regulate, with investment consultants formally outside of the FCA’s scope.

Despite this, he suggested that work on resolution regimes, alongside stress testing, should be extended "not just pension funds but across the non-bank arena".

Rathi also raised particular concerns around pooled funds, questioning whether there was the financial acumen to understand what was happening amid the recent volatility, particularly when overlaid with derivatives.

"If you are buying a product like that, you need the governance and decision making in place to move very quickly when markets move incredibly fast," he stressed. "Some had terms which would allow for cash to be called, but it was 10 days - so it doesn’t work in an environment where things are moving very fast.”

Adding to this, Counsell suggested that there is also "a broader question about the overall governance and the quality of governance seen within small pension schemes", agreeing that "there was really an issue in terms of speed and decision making".

"We really do worry about the degree to which smaller schemes are sufficiently well run and we have quite a lot of evidence that demonstrates that they are likely to be less well run," he stated.

Counsell suggested that consolidation could help address some of these concerns, as well as help work towards placing a professional trustee on every scheme board.

More broadly, Counsell said that while there are some "incredibly capable trustees", as was evident in the response to the recent liquidity issues, the future regulation of professional trustees is "certainly something we should give quite a lot of consideration too".

"In terms of their regulation going forward, that does bear thinking about and we do need to think about whether or not there are benefits to regulating professional trustees," he stated.

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