Pensions Regulator Urges Robust Liquidity Risk Analysis

By Irene Madongo
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Law360, London (June 1, 2021, 2:07 PM BST) -- Trustees of retirement saving schemes have improved their understanding of the liquidity risks facing their programs, but they should be more robust when they analyze those dangers, a director at the pensions watchdog has warned.

David Fairs, an executive director at The Pensions Regulator, said that major government and central bank intervention programs around the globe in late 2020 — such as lowering interest rates — helped to stabilize markets during the coronavirus outbreak. But interventions in the future cannot be guaranteed, he added.

Trustees will require a better understanding of how risks can arise within their retirement schemes, particularly in times of market stress, Fairs wrote in a blog on the watchdog's website on Friday.

"As pension scheme strategies have evolved, we believe that trustees have needed to improve their understanding of the liquidity risks their schemes are exposed to and to actively monitor and mitigate those risks," Fairs wrote. "We would expect more robust liquidity risk analysis to be carried out to allow, for example, for severe stress-testing for simultaneous market shifts."

The watchdog also wants trustees to have a clearer understanding of the cashflow and liquidity dynamics of their pension plans and how these might change when the market is under stress, Fairs, TPR's executive director of regulatory policy, analysis and advice, said.

He added that the regulator will review responses from a consultation on its new code of practice, which closed in May. He pointed to an expectation in the proposals that says that, unless there are exceptional circumstances, governing bodies should ensure that no more than a fifth of scheme investments are held in assets that are not traded on regulated markets.

"We acknowledge that some concerns have already been raised, particularly around the level of the limit, and we are considering what adjustments might be appropriate. We welcome views on the draft expectation that we have set," Fairs wrote.

Scottish Widows cautioned in May against a plan to manage the fees paid by retirement saving plans. The company was commenting on a government consultation on improving investments in the illiquid assets of defined contribution schemes, such as venture capital.

The pensions provider said that introducing a regime for the performance fees, which are often paid to fund managers, would be confusing for customers and are not needed.

--Editing by Joe Millis.

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