TPR dashboards will identify LDI mandates at risk of capital calls
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The Pensions Regulator said it has “built dashboards to provide a fuller market narrative to more efficiently spot compliance trends across both pooled and segregated mandates”, in a letter to the governor of the Bank of England sent in January and published on Wednesday.
The dashboards will identify funds and bespoke liability-driven investment mandates at greatest risk of requiring a capital call over the next month under market stress situations, the regulator explained.
A TPR spokesperson said: “The dashboards represent an analytical framework helping provide a forward perspective of financial stability risks in the liability-driven investment market, which we share with the Bank of England and Financial Conduct Authority. It is based on industry data covering the majority of pension schemes’ LDI mandates and is updated weekly.”
The dashboards were built after the government accepted a recommendation by the Bank of England’s Financial Policy Committee that TPR should incorporate financial stability considerations in its decision making, balancing this with its other objectives.
TPR’s chief executive Nausicaa Delfas said: “TPR will continue to work with the Bank of England and other regulatory partners to ensure any risks to financial stability in the pensions sector are reduced.”
FPC welcomes regulator’s data collection
The letter to the Bank’s governor was published after the FPC included comments about TPR and LDI resilience in the minutes of its latest meeting. In these, it welcomed that TPR was looking to collect more data and strengthen its data collection capabilities.
“Addressing data gaps and embedding the more regular use of data analytics was essential to building a deeper understanding of vulnerabilities and resilience in the LDI sector as well as market-based finance more broadly,” the report reads.
The committee also welcomed progress made on the resilience of liability-driven investments since it recommended higher buffer levels in November 2022. It said that the system was “continuing to function well, with funds maintaining higher levels of resilience compared with prior to the LDI episode in September 2022”.
A year ago, the FPC set out a steady-state resilience standard for LDI funds to be resilient to a yield shock of at least 250 basis points, in addition to the resilience required to manage other risks and day-to-day movements in yield.
Then, in April 2023, TPR published LDI guidance setting out that it expected a steady-state resilience standard for LDI funds, including expectations for recapitalisation periods.
The committee noted that "areas for improvement that FPC 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".
Data will provide clear view of DB hedging activities
The market has shifted to the new operating environment and achieved the objective of materially increasing resilience, said Simeon Willis, chief investment officer of XPS Pensions Group.
“In my view the largest part of this step change was made voluntarily by the industry within weeks of the start of the LDI crisis in September 2022,” he added.
Willis said the industry was still awaiting news on the improved data on the holdings of pension schemes and the aggregate industry exposure to physical hedging assets and derivatives. Information was being collected as part of additional questions in pension scheme returns with a deadline of 31 March.
“Once that data is published, it will provide a clear view picture of the hedging activities of UK pension schemes for the first time in over five years,” he believes.
In October 2022, the Bank of England had to step in as a gilts buyer of last resort, after the UK government’s fiscal announcements had sent gilt markets into a tailspin. Unprecedented demand by LDI managers for more collateral led to forced gilt sales by defined benefit pension funds, which in turn drove up yields, leading to further collateral calls.
In November 2022, the FPC recommended that the Pensions Regulator should take action to ensure LDI funds were resilient to higher interest rates. The same month, TPR issued a statement in response to overseas authorities requiring buffer levels to withstand gilt yield swings of 300-400bps.
How will data collection change regulatory activity?
