LONDON - Tougher rules for liability-driven investment (LDI) funds due next week from the Bank of England must strike a balance between improving resilience and allowing the funds to remain useful, UK government ministers said on Wednesday.
LDI funds, used by pension schemes to match assets with payouts, were caught out by a crash in the prices of UK government bonds they hold, with some smaller and pooled schemes struggling to meet collateral calls.
The Bank of England had to step in to help bond prices recover.
The Bank's Financial Policy Committee is due next Wednesday to set out a "steady state" framework for managers of the funds regarding the size of cash buffers, along with improvements in data reporting and governance.
Lawmakers in Britain's parliament on Wednesday questioned whether pension schemes should be using LDI funds at all, and pensions minister Laura Trott agreed a number of lessons need learning.
"But it still remains the case that LDI has a useful place I believe in the overall investment options available to pension schemes," Trott told a parliamentary committee.
Better data reporting by funds needed mandating, Trott said.
LDI funds, which are typically listed in Dublin and Luxembourg, had cash buffers that could cope with a 100 basis point move in interest rates, but yields on gilts rocketed by 160 basis points last September.
The funds now hold higher buffers for coping with a 300-400 basis points yield move, but industry officials warn that if buffers were permanently set at high levels, LDI funds could become unviable for some schemes to use.
"We need to be very mindful about the burdens we are placing on smaller funds. In the longer term we do think it is very important we see some consolidation," Trott said.
City minister Andrew Griffith said LDI funds had faced a "unique and exceptional" period, and banning them would not be consistent with getting the right balance in regulation to allow pension schemes to do their job.
"A lack of performance is a risk in itself," Griffith said.
(Additional reporting by Tommy Wilkes; Editing by Andrea Ricci)