Demands building an independent inquiry into the pension turmoil that has left several funds hours from collapse
- Politicians and industry experts call for an investigation into the collapse
- The chaos showed how exposed the repo sector is to the strong sell-off in the bond market
- Highlighting Liability-Driven Investment Strategies
Demands are mounting for an independent inquiry into the pension turmoil that has left several funds hours away from collapse.
Politicians and industry pundits have called for an investigation into the financial meltdown that drove some so-called liability-driven investing (LDI) funds to the brink.
The chaos, which followed Chancellor Kwasi Kwarteng’s mini-budget, showed how exposed the pensions sector is to a sharp sell-off in the UK bond market, and shed light on the LDI strategies used by pension funds covering millions of savers to ‘hedge’ themselves. against interest rates and inflation.
On the brink: The chaos showed how exposed the repo sector is to a sharp sell-off in the UK bond market
The mini-budget has been blamed, but regulators are urged to explain how they will stop a repeat of the debacle. Former pensions minister Ros Altmann wants an investigation into the pensions industry and the widespread use of complex financial products.
She said: ‘We need a proper investigation to understand the mistakes that have left hundreds of billions of pounds in pension assets chasing gilts. It is important that this does not happen again. LDIs are used by final salary pension plans to cover future payouts.
They “hedge” against interest rate, inflation and currency fluctuations, allowing pension funds to accumulate debt to buy more gilts.
But they allow funds to borrow to increase their holdings of gilts – leaving them exposed to losses if the market falls.
When the mini-budget triggered the biggest sale of government bonds in decades, many LDI funds nearly collapsed. Analysts say while the bond sale was a rare event, financial regulators and pension fund managers were caught ‘asleep at the wheel’ – including the Bank of England‘s Prudential Regulation Authority.
Tom Selby, at AJ Bell, said: “It was the strongest gilt sale since the turn of the millennium.” We need to examine what went wrong. It can’t be swept under the rug.
Next chief executive Lord Wolfson said LDIs were offered to his company in 2017 but seemed “very dangerous” – so he alerted the Bank to an impending “ticking time bomb”. In 2021, LDIs were a liability of £1.6 trillion, four times more than a decade earlier.
Former Tory leader Sir Iain Duncan Smith said: ‘Pension funds should not have put themselves in this position.