Risk register · entry
Q4 · Where models dieUK LDI / gilt crisis
'Safe' pension hedges hid leverage that forced a gilt margin doom-loop.
The world stops matching the model. Regime change and leverage turn a small error fatal.
Why this room
The payoff structure was simple and linear in normal times (a straightforward interest rate hedge) but the leverage embedded in it created a fat tail: a rare but plausible fiscal shock turned a diversifying trade into a correlated, self-reinforcing sell-off, the hallmark of Q4; the post-crisis liquidity buffers now explicitly size for that tail, pulling the risk toward Q1 where the same event is anticipated and budgeted for rather than modeled away.
The record
- 30-year gilt yield rose approximately 120 basis points over three trading days following the 23 September 2022 mini-budgetlikely
- Bank of England estimated total margin and collateral calls faced by LDI funds and pension schemes exceeded £70 billionlikely
- Bank of England's emergency gilt purchase facility launched 28 September 2022, capped at £5 billion per auction over 13 days (maximum £65 billion), later raised to £10 billion per auction for final five operationscertain
- Bank of England actually purchased £19.3 billion of gilts (£12.1bn conventional, £7.2bn index-linked) between 28 September and 14 October 2022certain
- Bank of England fully unwound and resold its gilt purchases by 12 January 2023certain
- Mini-budget included approximately £45 billion per year of unfunded tax cutslikely
- UK DB pension schemes ran roughly 60-70% of assets through some form of LDI strategy pre-crisisuncertain
- Schroders lost more than £20 billion of assets from its LDI business in Q3 2022likely
- Legal & General Investment Management's UK DB Solutions business saw £19.7 billion of client outflows in H1 2023likely
- The Pensions Regulator set a post-crisis minimum resilience requirement of 250 basis points, versus roughly 140 basis points of actual yield movement in the crisislikely
Sources
The book
This entry is one of 111 in the register. The full story, and what it cost the people who lived it, is in Risky Business by Claudia Zeisberger, David Munro and Joanna Reijgersberg-Siew.
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