LONDON, Nov 15 (Reuters) – Pension schemes and “non-banks” in general should be required to emulate banks and show in detail how they could be dissolved in a crisis without destabilizing the wider financial system , said the British Financial Conduct Authority (FCA). said Tuesday.

Liability-driven investment (LDI) funds, which help pension funds meet future payments, struggled to meet collateral calls on their holdings of UK government bonds in September, forcing the Bank of England to intervene to buy gilts.

FCA chief executive Nikhil Rathi said “work needs to be done” in pension funds and other “non-banks” on resolving or winding up a crisis.

“How do we deal with failures? Rathi told the House of Lords Industry and Regulators Committee.

It was not clear that pension funds had the “financial sense” to understand what would happen to LDI funds in a crisis, Rathi said. Consultants who have advised pension funds on the use of LDI also need to be regulated, he added.

Custodian banks that were part of the LDI chain also struggled to cope with the volume of business in September and need to be looked into, Rathi said.

There is a question whether LDI is a product that will be available in the future in the same way it has, Rathi said.

The Pensions Regulator (TPR) oversees UK pension schemes, while the FCA regulates asset managers in London who manage LDI funds which are themselves listed in European Union states such as Luxembourg and Dublin.

TPR chief executive Charles Counsell was ‘pleased’ that pension plans are using LDI funds given the need to hedge interest rate fluctuations, but said TPR has also encouraged pension plans also assess the risks.

Reporting by Huw Jones, editing by Iain Withers and Bernadette Baum

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