Bank of England orders raid after pension chaos

The Bank of England has called for a crackdown on pension funds to prevent another crisis like the one sparked by Liz Truss’s mini-budget.

In a report from its Financial Policy Committee (FPC), the central bank said funds holding liability-driven investments (LDIs) should be able to withstand “severe but plausible strains” in UK government bond markets.

It suggested that the Pensions Regulator introduce a stress test for LDI funds to ensure they can handle a 2.5 percentage point rise in bond yields and requires them to hold more cash to cope with daily market movements.

LDIs were used to ensure that bond funds had enough money to make future payouts while hedging against movements in inflation and interest rates.

They were heavily exposed to gilts, and as prices fell, LDI funds had to sell them to raise money for their lenders, who asked for more collateral.

This plunged many into crisis and forced the bank to pump billions into the financial system. The panic began when then-Chancellor Kwasi Kwarteng announced $45 billion in tax cuts.

The FPC said the regulator should take action “as soon as possible” to mitigate the risks of LDIs and avoid recurrence.

The bank also highlighted “vulnerabilities” caused by market-based funding, sometimes referred to as “shadow banking.”

Shadow banks are intermediaries that can lend and take deposits, but are not subject to regulatory oversight like normal banks.

These may include hedge funds, private equity and mortgage lenders, but also certain activities and products created by regulated banks such as

The FPC said there was “an urgent need” for resilience in the shadow banking system, noting that vulnerabilities could emerge during market turbulence.

It added “entanglements within the system,” meaning actions taken in some areas “could significantly increase stress across the system.”

Measures taken by hedge funds to reduce exposure were said to have added to recent interest rate market volatility.

However, the bank confirmed that UK authorities are “working to reduce domestic vulnerabilities”.

The UK banking system is “resilient” despite a string of US bank failures and UBS’s emergency takeover of Credit Suisse this month.

The FPC report stressed that the UK banking system is “well capitalised” and able to support the economy even if economic conditions are “worse than expected”.