The pension watchdog has called for emergency talks over the UK market turmoil

The Pensions Authority has been drawn into high-level emergency talks led by the Treasury and the Bank of England for the first time to consider measures to calm financial markets in the wake of the Kwasi Kwarteng mini-budget meltdown.

The watchdog overseeing the £1.5trillion pension sector is understood to have been called into closed-door meetings of the Authorities’ Response Framework (ARF), which are triggered when an “incident or threat” causes major disruption of financial services in the UK.

Officials will now consider how to further respond to the meltdown that followed the Chancellor’s speech and forced the Bank of England to step in with a £65bn bond-buying program to avoid a pension crisis.

The clandestine ARF was formed in response to the 2007-08 financial crisis. It aims to be a forum for senior Treasury officials and key city regulators – the Bank of England and the Financial Conduct Authority – to address threats to financial stability.

It is understood to be the first time the Pensions Regulator – led by industry veteran Charles Counsell – has attended, highlighting the scale of the crisis that prompted the Bank of England to intervene.

Experts said options likely to be considered by the forum include the creation of a “back-stop fund” controlled by the Bank of England to cover larger than expected collateral calls. A ban on the use of risky financial products, which have been blamed for worsening last week’s crisis, is also under consideration.

These products – known as “liability driven investments” or LDIs – are often used by terminal income pension funds, which manage more than £1.5 trillion in savings, to hedge against fluctuations in the value of some of their investments.

However, a fall in sterling and a collapse in UK bond prices meant fund managers were being asked to post more collateral on these complex contracts, meaning they had to sell assets to get short-term cash.

But these fire sales pushed prices down further and caused more volatility in the value of their assets. This, in turn, triggered larger collateral calls, unleashing a much-feared “doom loop” and stoking concerns about an outflow of pension fund assets.

Con Keating, chairman of the Bond Commission of the European Federation of Financial Analyst Societies, told the Guardian that the most effective way to avoid a similar crisis would be to ban the use of LDI strategies altogether.

“There are many possible ‘solutions’, but the only one that will work is to make sure the systems don’t give in to the practices that got us there,” he said. He added that authorities should allocate funds for six months to a year to process their current LDI contracts.

Keating said the pension regulator itself should also be asked why they allow these hedging contracts to be used. “I can only hope that they also recognize the central role the Pensions Inspectorate has had in promoting these regulations within our pension systems.”

He said he was concerned the regulator would advise against banning LDIs to avoid damaging their reputation.

The Bank of England and the Treasury declined to comment. A pension regulator spokesman declined to comment on the meetings, but said it was “closely monitoring the situation in financial markets to assess the impact on the funding of defined benefit pension plans.”

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