Parliamentarians examine the pensions strategy behind the UK market sell-off

MPs will scrutinize the Pensions Regulator for its role in overseeing thousands of pension plans that were on the brink of default this week following unprecedented market turmoil.

The Labor and Pensions Committee said on Sunday it intends to write to The Pensions Regulator, which oversees about 5,200 company defined-benefit plans that provide a secure income for around 10 million members.

Thousands of pension plans that had used derivative contracts to mitigate the impact of bond price movements on their liabilities faced emergency calls this week as gilt prices fell in an unprecedented selloff prompted by Chancellor Kwasi Kwarteng’s “mini” budget was triggered.

The Bank of England stepped in and took immediate action to stabilize financial markets with a £65 billion bond-buying programme.

“I can confirm that the Committee will be writing to TPR this week on issues raised by the Bank of England’s intervention,” said a Labor and Pensions Committee spokesman.

The development comes as liability-hedging strategies, which have been at the heart of this week’s turmoil, have come under increasing criticism.

Over the past two decades, pension funds have been encouraged by regulators to adopt liability-driven investment (LDI) strategies to help match their liabilities with their assets, often using derivatives.

These strategies require cash collateral to be deposited with an LDI manager; More cash may need to be added in response to market movements.

The sharp drop in 30-year Treasury bond prices this week has left pension funds using LDI strategies facing unprecedented margin calls, or calls for more cash. Systems that could not meet these demands risked defaulting or closing their hedging positions.

At the end of this week, a week after the financial report, pension schemes using LDI were still selling stocks and bonds and trying to get bailouts from their corporate backers to raise money to meet those margin calls.

“The sector is not doing well at the moment and it is difficult to get system-level information from LDI managers on what has been done and when,” said David Fogarty of Dalriada, a trust firm that manages pension funds.

Lord Simon Wolfson, head of UK retailer Next, revealed earlier this week that he had warned the BoE in 2017 that LDI’s hedging strategy was a “time bomb”. Parliamentarians examine the pensions strategy behind the UK market sell-off

Adam Bradshaw

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