By Huw Jones
LONDON, March 22 (Reuters) - Tougher rules for
liability-driven investment (LDI) funds due next week from the
Bank of England must strike a balance between improving
resilience and allowing the funds to remain useful, UK
government ministers said on Wednesday.
LDI funds, used by pension schemes to match assets with
payouts, were caught out by a crash in the prices of UK
government bonds they hold, with some smaller and pooled schemes
struggling to meet collateral calls.
The Bank of England had to step in to help bond prices
recover.
The Bank's Financial Policy Committee is due next Wednesday
to set out a "steady state" framework for managers of the funds
regarding the size of cash buffers, along with improvements in
data reporting and governance.
Lawmakers in Britain's parliament on Wednesday questioned
whether pension schemes should be using LDI funds at all, and
pensions minister Laura Trott agreed a number of lessons need
learning.
"But it still remains the case that LDI has a useful place I
believe in the overall investment options available to pension
schemes," Trott told a parliamentary committee.
Better data reporting by funds needed mandating, Trott said.
LDI funds, which are typically listed in Dublin and
Luxembourg, had cash buffers that could cope with a 100 basis
point move in interest rates, but yields on gilts rocketed by
160 basis points last September.
The funds now hold higher buffers for coping with a 300-400
basis points yield move, but industry officials warn that if
buffers were permanently set at high levels, LDI funds could
become unviable for some schemes to use.
"We need to be very mindful about the burdens we are placing
on smaller funds. In the longer term we do think it is very
important we see some consolidation," Trott said.
City minister Andrew Griffith said LDI funds had faced a
"unique and exceptional" period, and banning them would not be
consistent with getting the right balance in regulation to allow
pension schemes to do their job.
"A lack of performance is a risk in itself," Griffith said.
(Additional reporting by Tommy Wilkes; Editing by Andrea Ricci)
Messaging: huw.jones.thomsonreuters.com@reuters.net))
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