Demands building for independent inquiry into pensions turmoil which left several funds just hours from collapse

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  • Politicians and industry experts call for crash investigation
  • Chaos showed how prone the pension industry is to a sharp sell-off in the bond market
  • Shed Light on Responsibility Investment Strategies

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Demands for an independent investigation of the pension turmoil that left several funds just hours away from collapse are mounting.

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Politicians and industry experts have called for an investigation into the financial meltdown that has brought some so-called liability-driven investment (LDI) funds to the brink.

The chaos that followed Chancellor Kwasi Kwarteng’s mini-budget showed just how vulnerable the pension industry is to a sharp sell-off in the UK bond market and shed light on the LDI strategies used by pension funds reaching out to millions of savers to ‘hedge’. against interest rates and inflation.

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On the verge: Chaos has shown how vulnerable the pension industry is to a sharp sell-off in the UK bond market

The mini-budget has been blamed, but regulators are being urged to explain how they can prevent a repeat of the fiasco. Former pension minister Ros Altmann wants to investigate the pension sector and the widespread use of complex financial products.

She said: “We need to do a proper investigation to understand the mistakes that have been made that have seen hundreds of billions of pounds in pension assets chasing pigs. It’s important that this doesn’t happen again.” LDIs are used by pension plans on the last paycheck to cover future benefits.

They are “insured” against fluctuations in interest rates, inflation and currencies, allowing pension funds to build up debt to buy more securities.

But they allow borrowing to increase their holdings of securities, leaving them open to losses if the market falls.

When the mini-budget triggered the biggest sell-off in government bonds in decades, many LDI funds were on the verge of collapse. Analysts believe that while the bond sell-off was a rare event, financial regulators and pension fund managers have been caught sleeping at the wheel, including the Bank of England’s Prudential Regulatory Authority.

Tom Selby of AJ Bell said: “It was the biggest gilt sale since the turn of the millennium. We need to see what went wrong. It can’t be swept under the rug.”

The next chief executive, Lord Wolfson, said that LDIs were offered to his company in 2017 but looked “very dangerous” so he warned the Bank of an impending “time bomb”. By 2021, LDIs were underpinning £1.6 trillion in commitments, four times more than ten years earlier.

Former Tory leader Sir Ian Duncan Smith said: “The pension funds should not have put themselves in this position.”



Credit: www.thisismoney.co.uk /

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