Pensions Regulator reaffirms need for higher cash buffers

The TPR guidance was in response to a communication from Irish and Luxembourg fund regulators to LDI fund managers also issued Wednesday

The Pensions Regulator reaffirmed the need for U.K. pension funds to maintain higher levels of cash buffers against yield rises, in guidance on liability-driven investment strategies issued Wednesday.

The TPR guidance was in response to a communication from Irish and Luxembourg fund regulators to LDI fund managers also issued Wednesday. The Central Bank of Ireland and Commission de Surveillance du Secteur Financier in Luxembourg are known collectively as National Competent Authorities.

The NCA regulators engaged with LDI fund managers during the recent U.K. gilt market volatility and found improvement, with an average yield buffer of 300 to 400 basis points built up, according to the NCA statement to fund managers. In the current market outlook, the regulators ‘do not consider that any reduction in the resilience at individual sub-fund level is appropriate at this juncture,’ it stated.

TPR's guidance statement called on trustees using LDI to maintain an appropriate level of resilience ‘to better withstand a fast and significant rise in bond yields,’ and to improve their operational governance.

TPR CEO Charles Counsell said in the guidance that LDI funds are regulated in the country where providers are based, which in most cases are European Union countries. 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, Counsell said.

Most pension funds will not need to immediately change investment strategies to fit with the new expectations, but the guidance does give them more confidence to plan those strategies, investment consultant Lane Clark & Peacock said in a separate email that called for better systemic oversight by regulators to help avoid a repeat of the recent market stress.

LCP partner Dan Mikulskis said in the email that the regulators' expectations for buffers to support LDI should ‘enable schemes to focus on now developing a longer term investment strategy that works for them.