The pensions regulator has for the first time been enlisted in high-level emergency talks led by the Treasury and the Bank of England as they discuss measures to calm financial markets following the collapse which followed Kwasi Kwarteng’s mini-budget.
The watchdog, which oversees the £1.5billion pensions sector, is said to have been called into closed-door meetings of the Authorities Response Framework (ARF), which are triggered when an “incident or threat “could lead to a major disruption of financial services. United Kingdom.
Officials will now consider how to further respond to the collapse that followed the Chancellor’s speech and forced the Bank of England to step in with a £65billion bond-buying program to avert a crisis retirements.
The secret ARF was created in response to the financial crisis of 2007/8. It is meant to be a forum for senior Treasury officials and the city’s main regulators – the Bank of England and the Financial Conduct Authority – to deal with threats to financial stability.
It is understood this is the first time the pensions regulator – led by industry veteran Charles Counsell – has been involved, underscoring the scale of the crisis which led to the Bank’s intervention. ‘England.
Experts said options likely to be considered by the forum include the creation of a “rescue fund” – controlled by the Bank of England to cover larger than expected collateral calls. A ban on the use of risky financial products that have been blamed for amplifying last week’s crisis is also under consideration.
These products – known as liability-driven investing or LDI – have been widely used by mainly final salary pension funds that manage more than £1.5bn of savings to help protect against fluctuations in the value of some of their investments.
However, a fall in the pound and a crash in UK bond prices sparked calls for fund managers to provide more collateral on these complex contracts, meaning they had to sell assets to find short-term cash.
But these fire sales have further depressed prices, leading to greater volatility in the value of their assets. That, in turn, sparked larger collateral calls, triggering a much-dreaded “catastrophic loop” and raising concerns about a drain on pension fund assets.
Con Keating, chairman of the bonds committee of the European Federation of Societies of Financial Analysts, told the Guardian that the most effective way to avoid a similar crisis would be to ban the use of LDI strategies altogether.
“There are many possible ‘solutions’, but the only one that will work is to ensure that systems cannot engage in the practices that led us to this,” he said. He added that the authorities should grant funds from six months to a year to unwind their current LDI contracts.
Keating said the pension regulator itself should also be asked why it allowed the use of these hedging contracts. “I can only hope they can also recognize the pivotal role played by the pension regulator in promoting these arrangements within our pension schemes.”
He said he was concerned the regulator would advise against an LDI ban, to avoid damaging his reputation.
The Bank of England and the Treasury declined to comment. A spokesperson for the pensions regulator declined to comment on the meetings, but said it was “closely monitoring the situation in the financial markets to assess the impact on the funding of defined benefit pension schemes”.