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Tuesday, May 13, 2025

Lawmakers call for Bank of England role in pensions after LDI debacle

Lawmakers call for Bank of England role in pensions after LDI debacle

The Bank of England should help oversee pension schemes, with powers to order other regulators to take action, a committee of lawmakers from Britain's parliament said on Tuesday.
The House of Lords' industry and regulators committee said watchdogs in the liability-driven investment (LDI) sector appear to have been "too slow" to recognise risks, and made a recommendations to UK financial services minister Andrew Griffith on Tuesday.

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

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 whose oversight is complex.

Pension schemes which appoint LDI funds are managed by The Pensions Regulator, while LDI managers are regulated by the Financial Conduct Authority. The funds are listed in Luxembourg and Dublin according to European Union rules.

The government should consider giving the BoE's Prudential Regulation Authority a role in overseeing pension schemes, the committee said. The BoE's Financial Policy Committee should have powers to direct action by regulators in the pensions sector if they are too slow, it added.

Accounting rules should be reviewed to see if they can take a longer term view of pension investments, the committee said.

EU rules do not permit the use of derivatives in LDI funds, but Britain, now outside the bloc, has applied them in a "permissive" way.

"The government should review whether the use of leverage and derivatives by pension schemes should be more tightly controlled in the future," the committee said.

It backed calls from the FCA that investment consultants, who advise pension scheme trustees on using LDI funds, should be regulated as a "matter of urgency".

The BoE is due next month to set out a framework to improve the resilience of LDI funds.

Ed Wilson, a partner at consultants Isio, said he worried that the backlash against LDI would go too far when it was still a valuable tool for many plans. "LDI in many ways has self-regulated already," Wilson said.
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