Defined benefit pension funds scrambled for liquidity in the aftermath of September’s “mini” Budget, which pledged extensive unfunded tax cuts and precipitated a deterioration in markets. Around 60 per cent of schemes in the UK have invested in LDI, according to TPR.
Gilt yields spiked and collateral calls poured in for schemes. The Bank of England launched a 13-day, £13.9bn bond-buying intervention in a bid to stabilise prices.
Markets have stabilised and inquiries have begun into schemes’ handling of October’s turmoil. The Work and Pensions Committee will hear from industry bodies and experts, including the Pensions and Lifetime Savings Association, on November 23.
Not all parts of the system performed as we would have wanted them to.Nikhil Rathi, FCA
On November 7, FCA chief executive Nikhil Rathi and interim chair Richard Lloyd appeared before the Treasury Committee to discuss its recent work. At the hearing, Lloyd highlighted a “gap in regulation” concerning investment consultants. Investment consultants are not regulated by the FCA.
In the same month, Sarah Breeden, the BoE’s executive director for financial stability strategy and risk, called on regulators to review how leverage is managed.
Speaking at a meeting of the Industry and Regulators Committee on November 15, Rathi reiterated this message and called for the regulation of investment consultants. Rathi also suggested “gaps in competence” for some investors.
Appearing alongside him, TPR chief executive Charles Counsell suggested a lack of awareness among some trustees over LDI, particularly at small schemes, and expressed concerns over the standard of their governance.
FCA reiterates call for regulation of investment consultants
There have been previous calls for investment consultants to fall within the FCA’s remit. In 2019, the Competition and Markets Authority advised the Treasury to extend the FCA’s regulatory perimeter to cover services provided by investment consultants.
In his November Treasury Committee appearance, Lloyd declined to agree whether the regulation of investment consultants would have “solved the problem” of October’s volatility, particularly given the unexpected nature of its trigger.
Rathi emphasised to the Industry and Regulators Committee that government bond markets are currently less liquid than before, and also pointed to the “extraordinary” speed and scale of the turbulence that unfolded.
“Not all parts of the system performed as we would have wanted them to,” Rathi admitted.
“There were clearly gaps in capability and competence in some of the investors. There were clearly gaps in the investment consultants. We do believe they should be regulated, which they’re not at the moment.
