Bank of England’s failure to police pension funds made mini-Budget crash worse, Lords say

BOE

The Bank of England’s failure to police pension funds made the mini-Budget crash worse, an influential group of Lords has said, in a report likely to fuel debate over the collapse of Liz Truss' premiership.

The upper chamber’s industry and regulators committee said the Bank, the City watchdog and The Pensions Regulator (TPR) all failed to sufficiently focus on the risks associated with so-called liability-driven investment strategies (LDIs) used by pension funds.

Lord Clive Hollick, the Labour peer who chairs the committee, said the regulators “were all blindsided”, adding: “The reality is they all missed it so they all have a responsibility here.”

The intervention comes just days after Liz Truss hit out against the “left wing economic establishment” for bringing her chaotic premiership to an end. Ms Truss argued in an essay in The Telegraph she was never given a “realistic chance” to implement her radical plans.

LDI strategies were at the centre of the crisis in financial markets late last year that forced the Bank to intervene and contributed to Ms Truss's resignation.

LDIs are derivatives meant to help insulate pension funds from the impact of inflation. However, the structure of the products meant that soaring bond yields in the wake of September's mini-Budget led to large cash calls on pension funds.

Problems were particularly acute because retirement businesses had used borrowed money to invest in LDIs, prompting fears that many British retirement funds could implode.

Lord Hollick said: “If it were not for the use of leveraged LDI, then it is likely there would only have been some volatility and a market correction, rather than a downward spiral in government debt markets that threatened the UK’s financial stability and led to significant losses as pension fund assets had to be sold in order to meet LDI liquidity requirements.”

Writing in The Telegraph on Sunday, Ms Truss said she had researched LDIs since her defenestration and was “shocked” by what she discovered.

She said: “At no point during any of the preparations for the mini-Budget had any concerns about [LDIs] and the risk they posed to bond markets been mentioned at all to me, the chancellor or any of our teams by officials at the Treasury.”

In a veiled swipe at Andrew Bailey, she added that she was only alerted to issues with LDIs the Monday after the mini-Budget “at which point the Bank of England governor was wanting to make a statement on LDIs”.

In a letter to City minister Andrew Griffith and Pensions minister Laura Trott, the Lords committee said the Government should look at giving the Bank’s Prudential Regulation Authority a role in overseeing pension schemes and give TPR a statutory duty to consider the impacts of the pensions sector on the wider financial system

The letter follows an investigation by the Lords committee into September’s market chaos, which forced Threadneedle Street to launch an emergency bond-buying programme to stabilise the market.

A spokesperson for TPR said: “We note the committee’s recommendations and are already taking action to learn lessons and address many of the issues raised, while operating within the scope of our statutory objectives. We will work with our key partners to consider other areas of focus set out by the Committee.”

A spokesman for the Financial Conduct Authority said: “During this unprecedented period of volatility, we worked closely with the Bank of England and the Pension Regulator as well as the fund managers to quickly improve the resilience of LDI portfolios.

“We are continuing to work closely with regulatory partners, domestically and internationally, so that any lessons necessary are learned from these extreme events. And we are continuing to supervise fund managers on how they build their resilience to possible future volatility.”

The Bank of England declined to comment.