Resilience levels and reduced risk
The NCA Statements refer to European GBP LDI funds having an average Yield Buffer (protection level from long-term gilt yield adjustments before capital reserves are used up) of 300-400 basis points – the expectation is that resilience levels and reduced risk profiles are now maintained given the present ‘market outlook’. The Regulator ‘acknowledges’ these expectations.
Schemes that cannot or do not wish to hold these levels of liquidity should discuss hedging levels with their advisers. Reduced hedging should be done in a ‘predetermined’ way.
ACTION FOR TRUSTEES: the Regulator’s expectations: Trustees are likely to require advice from their investment consultants and legal advisers on many of the action points.
Trustees must keep suitable documentation of relevant arrangements and appraise the arrangements regularly.
Testing the liquidity buffer
This is the responsibility of the trustees (although adviser input will be needed).
Departing from the liquidity buffer
Actions for trustees that ‘depart’ from the NCAs’ liquidity buffer include:
- being able to show the buffer that is set up;
- risk assessing how the scheme will react to stressed market events to ensure resilience; and
- having a plan for achieving higher resilience levels should market volatility return.
Review governance processes
Governance processes must be reviewed so that improvements can be made where necessary – trustees should ensure that the following practical matters are or have been addressed:
- check authorised signatories are updated and governance is such that quick decisions can be made when needed;
- stress the LDI (both non-leveraged and leveraged) using a NCA set yield shock;
- calculate necessary collateral and asset type;
- set out dates that collateral/margin calls have to be made, and consider relevant matters in respect of the cash settlement;
- confirm instruction and signature details, collateral/cash margin payment arrangements and post collateral/margin call asset allocation.
Continue discussions with LDI managers
Discussions with LDI managers should include replenishment triggers, meeting call processes and liquidity visibility.
Ensuring liquidity through the employer
Schemes that wish to maintain liquidity through sponsoring employer credit must make sure that there is appropriate documentation in place that is reviewed at suitable intervals. Facilities must be short-term and for liquidity. Legal advice would be required.