Bank of England says ‘lessons must be learned’ from pension crisis

The Bank of England said “lessons must be learned” from the pensions crisis which triggered unprecedented intervention in UK gilt markets, and stressed the need for action to mitigate similar risks in other countries. other parts of the financial sector.

“While it may not be reasonable to expect market participants to insure against all extreme market outcomes, it is important that lessons are learned from this episode and that levels of appropriate resilience are ensured,” the BoE’s financial policy committee said in its quarterly update on Wednesday.

The bank also warned that UK households and businesses were under pressure as high interest rates, high energy costs and the cost of living crisis combined to make it harder to pay bills and loans. . Mortgages were of particular concern, with the bank warning that household debt levels could reach historic highs.

A sharp rise in UK government bond yields following Chancellor Kwasi Kwarteng’s ‘mini’ budget on September 23 sparked a wave of cash calls for pension funds that used derivatives to manage their risk.

Pension funds were then forced to sell gilts to meet fund calls, leading to a spiral that prompted the BoE to step in with a £65bn bond-buying program to stabilize the steps.

The BoE said the “dysfunction” of the government securities market shares characteristics with the broader non-banking financial system, where big risks to financial stability can accumulate outside the purview of regulators.

The bank’s financial policy committee discussed potential vulnerabilities in money market funds and open-ended funds, which could trigger greater market volatility if they were forced to sell in a hurry to meet margin calls in a declining market.

The report adds that the Financial Stability Board, a global coordinating body of regulators and central banks, is already working to improve the “resilience” of non-bank financial institutions.

“FPC believes it is crucial that this work leads to effective policy outcomes to improve the resilience of non-bank financial institutions globally in the face of sharp reductions in asset prices and liquidity,” he said. -he declares.

The BoE said it would work with both the pensions regulator and the Financial Conduct Authority “to ensure there are enhanced standards” in the pensions market. Pension funds are scrambling to shore up their cash reserves ahead of the end of the BoE’s bond-buying program on Friday.

The pension crisis comes against the backdrop of a global economic outlook which the BoE said “has continued to deteriorate significantly” since its July update, with interest rates soaring and geopolitical tensions heightened.

The bank also raised concerns about the pressures facing UK households and businesses. With 20% of fixed-rate mortgages set to refinance next year, a historic percentage of households are set to have “high” levels of mortgage debt by 2023, as they face soaring prices energy and high inflation, which makes the “most vulnerable to shocks”.

Companies, especially small and medium-sized ones, are also facing higher interest rates and cost pressures – although their debt levels are not yet close to the peaks of the financial crisis, which puts them in a better overall position.

The BoE stressed that the country’s banks have “considerable capacity to sustain lending” and would be able to withstand “the impact of severe economic outcomes”, such as higher levels of defaults.

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