MPs have launched an inquiry into the pensions market crisis that forced the Bank of England to intervene with a £65bn emergency scheme amid the chaos in financial markets after Kwasi Kwarteng’s mini-budget.
The Commons work and pensions committee said it was looking into the problems faced by pensions funds earlier this month after the former chancellor’s disastrous tax and spending plans triggered an unprecedented rise in UK government bond yields.
The Bank was forced to intervene late last month to stop a “doom loop” in the gilt market as funds used in the pensions industry to support the retirement schemes of people across the country came close to collapse.
In the market turmoil after the mini-budget, some liability-driven investment (LDI) funds risked being unable to meet cash demands on complex derivatives they had used to hedge against movements in interest rates.
In a market worth more than £1tn, the LDI funds had used long-dated gilts as collateral – assets pledged as security to back up a financial contract – to underpin their interest-rate derivatives. As gilt yields soared after the mini-budget, these schemes needed to deal with a rapid increase in collateral demands that they struggled to meet.
The work and pensions committee, led by the Labour MP Stephen Timms, said it was launching a “short inquiry” on the lessons that could be learned from the meltdown, including on the regulation and supervision of the pensions industry.
The cross-party group of MPs said it would look at the impact on pension savers, whether schemes had adequate protections in place, and if LDI investing was still “fit for purpose” or if changes were needed.
The Bank of England said earlier this month that while it was tough for the industry to insure against extreme market outcomes, it was “important that lessons are learned from this episode and appropriate levels of resilience ensured”.
Threadneedle Street stepped in with a promise to buy up to £65bn of government bonds on the grounds of financial stability. The intervention ended earlier this month after the Bank’s governor, Andrew Bailey, said the scheme must close.
Over the four days after Kwarteng announced £45bn of tax cuts funded by a vast expansion of public borrowing, long-dated government bond yields – which move inversely to prices – rose by more than the annual increase in 23 of the past 27 years.
Yields – or interest rates – on UK government bonds have fallen back in recent weeks after the Bank’s intervention and amid a series of U-turns on the former chancellor’s tax plans before Liz Truss announced her resignation as prime minister last week.
Despite falling further on Monday as the former chancellor Rishi Sunak emerged as the likely winner of the Conservative leadership race, long-dated bond yields remain above levels seen before the mini-budget.