Regulators look set to be grilled by MPs after pension funds faced disaster

Regulators appear to be being reprimanded by MPs after the turmoil in the financial markets pushed pension funds to the brink of disaster.

The Bank of England pledged this week to buy bonds on ‘any scale necessary’ to restore order – as it warned of a ‘material risk to the UK’s financial stability’.

His intervention was needed to avert a collapse of the pension industry, shedding light on liability-driven investments (LDIs), which are used by final-pay pension funds that back millions of savers to “hedge” themselves against the impact of interest rates and inflation.

But they were built with layers of gold-backed debt, creating a “time bomb” that nearly exploded this week.

Regulators such as the Bank, Financial Conduct Authority (FCA) and The Pensions Regulator may be questioned by MPs about what was almost a full-blown pension crisis.

Sources in Westminster said the selected Treasury committee this year would likely seek answers from banking governor Andrew Bailey and other officials. ‘The committee holds regular meetings with the Bank. This can be discussed,” the source said. The next CEO, Lord Wolfson, said LDIs were offered to his company in 2017 but didn’t “smelled good” and looked “very dangerous” – so he warned the Bank of an impending “time bomb”.

A year later, in 2018, the Bank said that some pension funds were not paying enough attention to the risks of a money shortage. By 2021, LDIs were supporting £1.6 trillion in liabilities, covering millions of savers – four times more than a decade earlier.

A sudden collapse in the price of UK government bonds, known as gilts, after Kwasi Kwarteng’s mini-budget left them on the brink of insolvency. It sparked a £65bn bailout by the Bank, which resulted in an accusation that regulators had failed.

Tory MP Kevin Hollinrake, a member of the Treasury Select Committee, said: ‘These LDIs have not been fully considered in the past and they should be.

“I’m sure the FCA will look into it more closely and it would make sense for the committee to do the same.

“Anything that entails systemic risk is something we have to get to grips with. I think the supervisor should look very carefully at the situation and also look at its own role in this situation, whether it has sufficiently managed those risks.’

Huw Pill, the bank’s chief economist, admitted this week that “some work remains to be done to shed light on and build resilience in some of the shadier parts of the non-banking financial sector.” When gold prices fell, LDI funds had to sell assets to raise cash as collateral, leading to a vicious drop in values ​​until the bank intervened.

A collapse of the LDI would have jeopardized the financial health of final pay schemes for about 10 million people.

The LDIs were overwhelmed as gold prices halved.

Baroness Altmann, a former pensions minister, called for a wide-ranging inquiry, saying: “The real problem underlying this is what has happened to economic and monetary policy in recent years and the illusion gilts were risk-free.” .’

• Chaos in the pension sector could resume when the Bank’s £65bn bond-buying plan expires in two weeks, industry figures warned. The watchdogs responsible for defined benefit plans are in daily talks with asset managers to avert another crisis on October 14. Regulators have convened emergency meetings as part of their authorities’ response framework, sources told the Financial Times. They fear that if the bank withdraws its support, bond sales will resume, putting further pressure on defined benefit funds.