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 quadrant
An interest rate hedge diversifies a pension scheme, and this one did, until it was leveraged. When gilt yields rose 120 basis points in three days after the mini-budget, collateral calls forced schemes to sell the gilts whose falling price was causing the calls. The Bank of England bought 19.3 billion pounds of them to stop it. Schemes now hold buffers sized for that move, which is the difference between a risk modelled away and one budgeted for.
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
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