Irish and Luxembourg financial regulators have published the final version of rules drawn up in the wake of the liability-driven investment (LDI) crisis in the UK in 2022.
The measures, effective 29 April, complement existing guidance from UK regulators to maintain the resilience of the LDI sector.
LDI-centred strategies were thrust into the limelight in 2022 after the then UK government’s “mini-budget” caused a sell-off in Gilts and had some pension schemes scrambling for liquidity to meet margin calls.
As part of the regulatory response to that, in April last year The Pensions Regulator (TPR) issued guidance that has led to pooled LDI funds and segregated mandates generally building up buffers in the 300-400 basis points range.
Under the final rules published this week by the Central Bank of Ireland (CBI) and Luxembourg’s Commission de Surveillance du Secteur Financier (CSSF), sterling-denominated LDI funds authorised in those jurisdictions will need to be able to resist a rise in sterling yields of at least 300 basis points.
Firm minimum
Steve Hodder, partner at consultancy LCP, said the new limits had been well trailed and that all pooled LDI funds were largely already operating in line with the requirements.
However, he noted that the CBI and CSSF rules stated 300bp as the minimum coverage level, when previous guidance had pointed to regulatory expectations of 300-400bp.
“Many pension schemes have more than 300bp in cover, but these rules could prompt renewed focus on whether that much is needed,” he told IPE. “The firm 300bp minimum could see increased confidence in being at the lower end of the 300-400bp range.”
Commenting on the investment restrictions being imposed by CBI and CSSF, the EU financial markets watchdog this week said the measures “are justified” and encouraged the regulators to monitor the evolution of the sterling LDI funds and to “assess the necessity to recalibrate the yield buffer”.
The European Securities and Markets Authority (ESMA) also said it was inviting supervisors managing funds in other jurisdictions to adopt similar measures.
TPR has said it will continue to work with the Bank of England and other institutions to make sure any risks to financial stability in the pensions sector are reduced.
Sterling LDI funds in Ireland and Luxembourg established on or after the new CCI-CSSF rules must comply with the yield buffer measure immediately while existing such funds have three months to comply.
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