Pension fund trustees should put in place appropriate buffers to manage any leveraged liability-driven investment arrangements, the U.K. Pensions Regulator said Monday.
In a new guidance, which was published following the September LDI crisis, the regulator said investors must also include an operational buffer specific to the LDI arrangement to manage day-to-day changes, in addition to the 250 basis points minimum.
Setting the right buffer level is essential so the fund can operate in the normal way even where there are sharp market movements, TPR said in a news release.
TPR wants pension funds to have the right governance and controls so they can react to market events quickly.
The sharp rise in U.K. interest rates in September forced U.K. pension funds to become forced sellers of assets at significant losses in order to meet the liquidity calls required by the fall in leveraged LDI values. Pension funds using derivatives as part of LDI portfolios were required to post additional collateral against their positions to meet liquidity needs.
"The unprecedented market volatility seen last September clearly demonstrated there is the need for stronger buffers, more stringent governance and operational processes and more oversight by trustees. Trustees must understand the risks they carry in their investment strategy, and only use leveraged LDI if appropriate," Louise Davey, TPR's interim director of regulatory policy, analysis and advice, said in the release.
Also on Monday, the U.K. Financial Conduct Authority published guidance for money managers stressing that it saw "significant deficiencies" in risk management, stress testing and communications with clients by managers.
"We expect firms in all sectors to manage their products and services in a way that will enable these to perform in line with their stated objectives. They should also do so in a way that does not create risks to either the orderly functioning or the stability of U.K. financial markets," the FCA said.
The FCA wants managers to ensure there are liquidity buffers set for each sub-fund to withstand severe stresses in the gilt market and to meet margin and collateral calls without adding to the market stress.