The wise heads on the Bank of England’s financial policy committee (FPC) discovered this year that they’re not as all-seeing as they might have thought. Their job is to spot financial risks before they become dangerous, but it turned out in late September there was a biggie they had missed – or, at least, seriously underplayed.
The debacle with LDI, or liability-driven investment, funds briefly threatened to blow a serious hole in the nation’s finances. In short, too many defined benefit pension schemes had been playing games of leverage to load up with extra helpings of gilts, or government IOUs. When Kwasi Kwarteng’s “mini”-budget upended gilt prices, the scramble among pension funds to shore up their derivative positions was chaotic.
