Pension fund panic led to Bank of England's emergency intervention: Here's what you need to know
LONDON – The Bank of England launched a historic intervention to stabilize the U.K. economy, announcing a two-week purchase program for long-dated bonds and delaying its planned gilt sales until the end of October.
The move came after a massive sell-off in U.K. government bonds — known as «gilts» — following the new government's fiscal policy announcements on Friday. The policies included large swathes of unfunded tax cuts that have drawn global criticism, and also saw the pound fall to an all-time low against the dollar on Monday.
The decision was taken by the Bank's Financial Policy Committee, which is chiefly responsible for ensuring financial stability, rather than its Monetary Policy Committee.
To prevent an «unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy, the FPC said it would purchase gilts on „whatever scale is necessary“ for a limited time.
Central to the Bank's extraordinary announcement was panic among pension funds, with some of the bonds held within them losing around half their value in a matter of days.
The plunge in some cases was so sharp that pension funds began receiving margin calls — a demand from brokers to increase equity in an account when its value falls below the broker's required amount.
Long-dated bonds represent around two-thirds of Britain's roughly £1.5 trillion in so-called Liability Driven Investment funds, which are largely leveraged and often use gilts as collateral to raise cash.
These LDIs are owned by final salary pension schemes, which risked falling into insolvency as the LDIs were forced to sell more gilts, in turn driving down prices and sending the value of their assets below that of their liabilities. Final salary, or
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