Pension fund consultant regulation would manage risks better

Pension funds use consultants, who don't need to be regulated, to advise on hiring LDI funds offered by asset management firms

Regulating consultants who advise pension funds would ensure greater focus on managing risks that can emerge from the sector, such as the recent difficulties with liability-driven investment (LDI) funds, the Financial Conduct Authority (FCA) said on Monday.

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 (BoE) to step in to buy gilts.

Pension funds use consultants, who don't need to be regulated, to advise on hiring LDI funds offered by asset management firms.

Perhaps if their advisers had been more sensitive to dealing with levels of stress like this, some of that risk would have been managed more effectively, FCA CEO Nikhil Rathi told parliament's Treasury Select Committee.

Data reporting on leverage in funds is needed, along with international action to regulate non-banking, the vast sector that includes LDI, Rathi said, echoing a call from the Bank of England earlier on Monday.

Rathi said it was hard to know if the turmoil seen in the gilts market could have been avoided had pension fund consultants been regulated, given that what happened was ‘wholly exceptional’.

Britain's Pensions Regulator does not collect systematic data on leverage in pension funds, and relies on trustees of the funds to manage those risks, Rathi said.

LDI funds are listed in EU states like Luxembourg and Ireland, and the FCA had to ask regulators there for data in order to respond to the turmoil in the UK, FCA acting chair Richard Lloyd told lawmakers.