MPs to inquire into pensions strategy behind UK market sell-off

MPs are to probe the pensions regulator over its role in supervising thousands of pension plans that were this week left teetering on the edge of default following unprecedented market turmoil.

The work and pensions committee said on Sunday that it intended to write to The Pensions Regulator, which supervises about 5,200 corporate defined benefit plans that deliver a secure income to around 10mn members.

Thousands of pension plans that had used derivatives contracts to mitigate the impact of movements in bond prices on their liabilities faced emergency cash calls this week as gilt prices fell in an unprecedented sell-off triggered by chancellor Kwasi Kwarteng’s “mini” Budget.

The Bank of England stepped in and took emergency action to stabilise the financial markets with a £65bn bond-buying programme.

“I can confirm that the committee will be writing this week to TPR about issues raised by the Bank of England’s intervention,” said a spokesperson for the work and pensions committee.

The development comes as the liability hedging strategies at the heart of this week’s turmoil face mounting criticism.

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

These strategies require cash collateral to be held with an LDI manager; more cash may need to be added in response to market moves.

This week’s sharp fall in the price of 30-year government bonds led pension funds using LDI strategies to face unprecedented margin calls, or demands for more cash. Schemes that could not meet these calls risked defaulting or having their hedging positions closed.

Late this week, a week on from the fiscal statement, pension schemes using LDI were still dumping stocks and bonds and seeking bailouts from their corporate backers to raise cash to meet these margin calls.

“The sector is not functioning well at the moment and it is hard to get information from LDI managers at a scheme level about what has been done and when,” said David Fogarty of Dalriada, a firm of professional trustees that manages pension funds.

Lord Simon Wolfson, head of Next, the UK retailer, revealed earlier this week that in 2017 he had warned the BoE that the LDI hedging strategy was a “time bomb”.