LONDON, Nov 15 (Reuters) – Pension schemes and ‘non banks’ in general should be required to emulate banks and show in detail how they could be wound down in a crisis without destabilising the wider financial system, Britain’s Financial Conduct Authority (FCA) said on Tuesday.
Liability-driven investment (LDI) funds, which help pension funds meet future payouts, struggled to meet collateral calls on their holdings of UK government bonds in September, forcing the Bank of England to step in to buy gilts.
FCA Chief Executive Nikhil Rathi said “work needs to be done” in pension funds and other ‘non-banks’ on resolution, or winding themselves up, in a crisis.
“How do we cope with failures?” Rathi told the House of Lord’s industry and regulators committee.
It was not obvious that pension funds had the “financial acumen” to understand what would happen to LDI funds in a crisis, Rathi said. The consultants who advised the pension funds on using LDI also need regulating, he added.
Custodian banks who were part of the LDI chain also struggled to cope with the volume of activity during September and need to be looked at, Rathi said.
There is a question about whether LDI is a product that is going to be available in future in the same way that it has, Rathi said.
The Pensions Regulator (TPR) oversees UK pension schemes, while the FCA regulates the asset managers in London who operate LDI funds which are themselves listed in European Union states like Luxembourg and Dublin.
TPR Chief Executive Charles Counsell was “content” that pension schemes were using LDI funds given the need to hedge moves in interest rates, but said the TPR has also encouraged pension schemes to assess the risks as well.
Reporting by Huw Jones, Editing by Iain Withers and Bernadette Baum
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