Guidance issued by The Pensions Regulator (TPR) in the UK back in April on liability-driven investments (LDI) “deliberately” at high level, the regulator announced, as it prepares to start the process of gathering feedback to understand if more clarification is needed.

Speaking at the Westminster Business Forum policy conference last week on next steps for UK pension services and regulation, Fred Berry, senior adviser at TPR, said that despite vocal criticism of LDI within the industry, the regulator believes its guidance is a helpful tool for pension schemes.

He added that TPR believes there is still a role for LDI, “but it has risks”. He said: “Those risks need to be managed, and they are risks for the individual pension schemes and more widely.”

He added that the Regulator’s focus is on pension schemes and their trustees: “Our regulatory grip as we call it is on scheme trustees.”

TPR issued LDI guidance for trustees last November and followed up with new guidelines in April. “Both of those being a coordinated effort with other regulators,” Berry said.

He pointed out that in April’s guidance, TPR was “very careful” to place LDI in the broader context of schemes’ investment strategies, which LDI strategies schemes need now that they are better funded and closer to their endgame and might need less leverage, and how much LDI schemes can afford given the increased resilience buffers.

Berry added that TPR’s guidance on resilience buffers is “remarkably similar” to the Bank of England’s levels.

He noted that for anyone that reads the LDI guidance in detail will see that the Regulator placed “huge emphasis on operational processes, the schemes’ plumbing, if you like, and similar emphasis on trustees understanding asset liquidity”.

“We all know that markets are dynamic things – yields don’t stay put and operational processes of schemes need to be able to cope with this,”Berry explained.

He added that “operational processes” have been overlooked at the expense of other “more exciting sexier aspects of pension schemes” previously.

He said: “I do hope that that is one of the big learnings everyone is going to take away: the importance of unglamorous beats like operations, admin – all that kind of stuff.”

He said that following the guidance, TPR is in the process of gathering feedback from the market on how the guidance is being interpreted, adding that if the interpretation is “not in line with what we were expecting” TPR may issue further clarification.

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