Bank of England says pension funds were hours from disaster before it intervened

Buses pass in the City of London financial district outside the Royal Exchange near the Bank of England on 2nd July 2021 in London, United Kingdom.

A workplace pension plan that provides a guaranteed annual income for life upon retirement is popular in the U.K.

As the values of the bonds fell early last week, the LDIs needed to liquidate large portions of their long-term gilt positions in an orderly fashion.

In a letter Wednesday to Conservative Party lawmaker Mel Stride, chairman of the Treasury Select Committee, Bank of England deputy Governor Jon Cunliffe revealed that LDIs issued dire warnings on the evening of September 27th as 30-year gilt yields rose by 67 basis points. Prices affect yields.

Multiple LDI funds were likely to fall into negative net asset value due to the prevailing yields. The funds were likely to have to begin the process of winding up the next day.

There was a chance that a large quantity of gilts would be sold on the market, driving a potentially self-reinforcing spiral and threatening severe disruption of core funding markets.

The Bank of England staff worked through the night to come up with an intervention that would prevent the crisis from happening.

The 30-year gilt yield plummeted after the Bank announced its emergency package.

The scale of the moves in gilt yields during this time was unprecedented, with two daily increases of more than 35 basis points.

He said that the increase in 30 year gilt yields was more than twice as large as the largest move since 2000.

It was bigger than any other historical move. The gilt market functioning was very stretched.