On the go: The Bank of England has called on market participants to learn lessons from the current volatility in gilt markets and has said that it is monitoring the behaviour of liability-driven investment managers, with its gilt-purchasing programme set to end on October 14.
Defined benefit schemes have faced collateral calls from LDI managers in response to spiking gilt yields. Having sat below 4 per cent prior to the government’s “mini” Budget, announced on September 23, the yield on 30-year gilts leapt to 4.99 per cent on September 27.
After falling in response to the BoE’s intervention, the gilts recommenced their ascent and pushed through 5 per cent on October 12.
In its ‘Financial policy summary’, published on October 12, the BoE said that alongside the Pensions Regulator and the Financial Conduct Authority, it is “closely monitoring the progress of LDI managers as they put their funds on a sustainable footing for whatever level of asset prices prevails when the bank ceases purchasing gilts, and to ensure LDI funds are better prepared for future stresses given current market volatility”.
“While it might not be reasonable to expect market participants to insure against all extreme market outcomes, it is important that lessons are learned from this episode and appropriate levels of resilience ensured,” it continued.
The BoE pointed out that while its Prudential Regulation Authority regulates bank counterparties of LDI funds, the central bank does not directly regulate pension schemes, LDI managers or LDI funds.
“Pension schemes and LDI managers are regulated by TPR and the FCA,” it noted, adding that LDI funds are typically based outside the UK.
