Bank of England to toughen up rules for liability-driven funds

By Huw Jones

LONDON (Reuters) - The Bank of England will set out a tougher framework next month to regulate liability-driven investment (LDI) funds, which could put them out of reach for some pension schemes, BoE executive director Sarah Breeden said on Wednesday.

LDI funds have been used by pension schemes to ensure they can meet payouts to pensioners in future years.

But turmoil in the British government bond market in September triggered by former Prime Minister Liz Truss's radical tax cut plans caused problems for these funds.

Yields on the government bonds or "gilts" held by LDI funds rocketed, and the funds struggled to meet urgent collateral calls to cover the fall in bond prices. The BoE had to intervene to buy gilts to help bring yields down.

"We will set out resilience outcomes that we want to see and if there are some schemes, perhaps because they are so small they are unable to meet those standards, it's a reasonable question whether an LDI strategy is appropriate for them," Breeden said.

"I don't think that it needs to be banned outright."

Breeden said LDI funds have been told to hold bigger liquidity buffers as an interim measure until "steady state" or permanent requirements will be set out in a statement from the BoE's Financial Policy Committee in the second half of March.

The rules will set out principles on leverage and liquidity, which will require an LDI fund to be able to replenish liquidity quickly and smoothly, and that risks from using LDI funds are properly understood, Breeden said.

The Pensions Regulator, which regulates pension schemes, and the Financial Conduct Authority, which regulates managers of LDI funds may have additional requirements, she said. Regulators in Luxembourg and Dublin, where LDI funds are listed, will also have their own requirements.

The "complete absence" of data on leverage in LDI funds will also be addressed, she added.

"We don't have basic data, whether it's the size of funds, the assets that are held, the exposures that they have, the leverage... it will need to be an important part of the steady state resilience framework from here."

(Reporting by Huw Jones; Editing by Alison Williams and Jane Merriman)