The Financial Conduct Authority has set out a number recommendations for asset managers to improve the resilience of Liability Driven Investment (LDI) funds.

The move follows recommendations published recently by the Bank of England’s Financial Policy Committee.

The watchdog has created guidance on risk management and operational arrangements for LDI managers so that they can, “address risks to market integrity and financial stability.”

Questions about the resilience of LDI funds caused a wave of economic instability last year follow the Budget by former Chancellor Kwasi Kwarteng. The lack of detail on how the tax cutting Budget would be paid for caused severe volatility in the gilt market and undermined LDI funds.

LDI funds are often used to provide long-term investment underpinning for pension funds.

The FCA said that since the events that occurred in the gilt market in September 2022, it has has been working closely with regulatory partners in the UK and internationally.

The regulator has also been engaging with firms involved in the management of LDI portfolios to develop and maintain increased resilience to deal with possible future volatility.

The FCA said it will continue to work with regulatory partners in engagement with this sector on implementing or complying with any further guidance or requirements issued by other authorities, including the Financial Policy Committee recommendations of March 2023 and The Pension Regulator’s guidance issued in April 2023.

Sarah Pritchard, executive director, markets at the FCA, said: “We have been clear that asset managers must take the necessary steps so that their LDI portfolios are resilient to future market volatility.

“Since September last year, we have been closely monitoring asset managers using LDI strategies as they make improvements and the sector is now much more resilient to potential risks, but there is more to be done.

“This guidance sets out what we expect in terms of risk management, stress testing and client communication, so that the necessary lessons are learned from last September’s extreme events. Many of these lessons will be relevant to firms beyond the LDI sector.”

Simeon Willis, chief investment officer at XPS Pension Group, said: “A theme running through the FCA announcement was one of all participants sharing greater responsibility for LDI arrangements being appropriate to achieve the end investor’s intended outcome.

"A higher bar is being set. It’s clear that a siloed approach from investment managers or investment advisers, narrowly focused on their own role alone, is insufficient to meet expectations."