The Pensions Regulator has been drafted for the first time in high-level emergency talks led by the Treasury and the Bank of England as they consider measures to calm financial markets in the wake of the crisis that followed Kwasi Kwarteng’s mini-budget .
The watchdog, which oversees the £1.5bn pensions sector, is understood to have been called to closed-door meetings of the Authority’s Response Framework (ARF), which are triggered when an “incident or threat” could cause a significant disruption to financial services. in the United Kingdom.
Officials will now consider how to respond further to the crisis that followed the chancellor’s speech and forced the Bank of England to step in with a £65bn bond-buying program to avert a pension crisis.
The secretive ARF was established in response to the 2007/8 financial crisis. It aims to be a forum for senior Treasury officials and key City regulators (the Bank of England and the Financial Conduct Authority) to address threats to financial stability.
It is understood to be the first time that the Pensions Regulator – headed by industry veteran Charles Counsell – has taken part, highlighting the scale of the crisis that prompted the intervention of the Bank of England.
Experts said options likely to be considered by the forum include the creation of a “safety 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 accused of fueling last week’s crisis is also being examined.
These products, known as liability driven investments or LDIs, have been widely used by most final salary pension funds managing more than £1.5m in savings to help protect against changes in the value of some of their investments.
However, a fall in the pound and a collapse in UK bond prices led to fund managers providing more collateral in these complex contracts, meaning they had to sell assets to raise cash with little in advance
But these fire sales further depressed prices, causing more volatility in the value of their assets. This in turn triggered larger collateral calls, triggering a much-feared “death loop” and raising concerns about a drain on pension fund assets.
Con Keating, chairman of the bond 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 entirely.
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“There are many possible ‘solutions’, but the only one that will work is to ensure that the schemes cannot be given over to the practices that got us there,” he said. He added that the authorities would have to give funds between six months and a year to cancel their current LDI contracts.
Keating said the Pensions Regulator itself should also be questioned about why it allowed the use of these cover contracts. “I can only hope that they can also recognize the central role that the Pensions Regulator played in promoting these arrangements within our pension schemes.”
He said he was concerned the regulator would advise against banning LDIs, in order to avoid tarnishing their reputation.
The Bank of England and the Treasury declined to comment. A spokesman 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 the defined benefit pension scheme”.