UK pension funds along with liability-driven investment (LDI) fund managers must ensure lessons from last Autumn’s crisis are learned and fully embedded into their operations and balance sheet, urged Sarah Breeden, executive director for financial stability strategy and risk at the Bank of England (BoE).

Speaking during the Westminster Business Forum policy conference last week on next steps for UK pensions services and regulation, Breeden said that following the LDI crisis last Autumn, the BoE undertook a “targeted” intervention in the Gilts market in order to deliver its financial stability objective and in doing so bought time for LDI fund managers to build their resilience.

But she reiterated that the bank’s intervention was to focus on the resilience of the Gilts market “rather than to protect the bonds and schemes themselves”.

Therefore, she said LDI fund managers should “carefully consider their individual risk profile”.


Breeden added that while the BoE’s financial policy committee does not have specific regulatory responsibility for either pension schemes or LDI managers, it recommends, however, a framework for steady-state resilience within LDI funds to ensure that in the future, core markets such as the Gilts market, can continue operating even while suddenly repricing.

She said: “That requires LDI funds to be resilient enough to prevent forced de-leveraging and Gilt sales in the event of severe but plausible stresses to Gilt yields.

“Funds should hold enough assets which can meet collateral demands to be able to absorb such a shock without having to sell assets. This avoids feedback loops that threaten financial stability. 

She noted that the Bank’s financial policy committee “intends for LDI fund resilience to be usable”. She added: “And after withstanding such stress LDI funds should be able to continue operating during a period of recapitalisation by their pension scheme members.”

The Pensions Regulator took a first step towards this guidance back in March.

No substitute for primary obligation

Breeden acknowledged that LDI funds cannot be expected to self insure against all possible shocks.

But she added that “we do need to ensure that there’s the right balance between private self insurance and a public backstop. Central banks cannot be a substitute for the primary obligation of LDI funds to manage their own risk”.

However, in situations where tail risks to financial stability materialise she said that the bank remains “ready to act”.

Launching the first system-wide exploratory scenario

The Bank has today launched its first system-wide exploratory scenario (SWES) exercise which aims to improve understanding of the behaviours of banks and non-bank financial institutions in stressed financial market conditions.

It will explore how those behaviours might interact to amplify shocks in UK financial markets that are core to UK financial stability, it announced.

Participating firms will include large banks, insurers, central counterparties and a variety of funds (pension funds, hedge funds, and funds managed by asset managers). This reflects the wide range of institutions engaged in UK financial markets.

The Bank added that participants will be actively engaged in both the design and execution of the exercise.

Recent events have shown that market-based finance has been increasingly prone to sudden liquidity stresses during periods of market volatility.

The BoE, working closely with the Financial Conduct Authority and The Pensions Regulator, will bring together data and information from various parts of the financial system to develop system-wide and sector-specific insights – thereby accounting for amplification effects within the financial system, it stated.

The exercise will improve the Bank’s and participating firms’ understanding of how markets operate under stress, support efforts to address vulnerabilities in the domestic market-based finance system and help in contributions to ongoing international policy work, it noted.

The Bank will publish the full list of participants and details of the stress scenario later in the year.

Read the digital edition of IPE’s latest magazine