TPR issues guidance on LDI buffers and governance
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In response to new requirements by the Central Bank of Ireland and the Commission de Surveillance du Secteur Financier in Luxembourg on the liquidity buffers in liability-driven investment funds, the Pensions Regulator has issued its own guidance on maintaining resilience, which extends to segregated mandates.
The regulator welcomed the statement by the two regulators, known collectively as National Competent Authorities. Ireland and Luxembourg are jurisdictions where many LDI funds are domiciled.
The two authorities said they consider current higher buffers of 300-400bps in sterling-denominated LDI funds to be appropriate and demand comprehensive explanations where a fund was looking to reduce this.
“The resilience of GBP LDI Funds across Europe has... improved, with an average yield buffer in the region of 300-400 basis points being built up. Given the current market outlook, the NCAs expect that levels of resilience and the reduced risk profile of GBP LDI Funds are now maintained, and do not consider that any reduction in the resilience at individual sub-fund level is appropriate at this juncture,” they wrote.
They also stressed that they had “engaged proactively” with LDI managers throughout the market turbulence.
In response to the NCA statement, TPR has issued its own guidance statement calling on trustees who use LDI “to maintain an appropriate level of resilience in leveraged arrangements to better withstand a fast and significant rise in bond yields”. The statement also calls on trustees investing in leveraged LDI to improve their scheme’s operational governance.
TPR said it acknowledges the two authorities’ expectation of maintaining a specific level of liquidity buffer along with the reduced risk profile, given the recent higher level of market volatility and future uncertainty, and the current geopolitical landscape.
The new buffer requirements extend beyond pooled funds, however, as TPR wants to see the same for single-client arrangements: “Where statements from the NCAs refer to pooled funds, we believe the same level of resilience should be maintained for segregated leveraged LDI mandates and single-client funds, as they face the same market risks and operational challenges.”
Chief executive Charles Counsell said: “LDI funds are regulated in the country their provider is based and, in most cases, these are EEA countries. We are very pleased therefore to see these joint statements from regulators in Ireland and Luxembourg setting clear expectations for the resilience of LDI portfolios."
He said the statement confirms TPR’s expectations for trustees and advisers when it comes to LDI.
"I urge trustees to read the statement and consider how they can meet the steps it outlines to ensure their scheme buffer is sufficient to cover a swift and substantial increase in yields at the level set by the NCAs,” he said.
"We continue to work closely with other regulators to ensure we learn from the challenges we have seen in recent weeks."
In the statement, TPR outlines steps trustees should take if their liquidity buffer falls below the level deemed acceptable by the NCAs and recommends all trustees using LDI should review their governance arrangements. It also recommends 10 practical steps trustees can take “to ensure they are able to react quickly in response to stress in the market”.
A further update will be issued in TPR’s Annual Funding Statement in April 2023, and in other statements and investment guidance “as necessary”, the regulator added.
