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The Wall Street Journal: U.K. pensions regulator pushed funds into derivatives strategy that prompted Bank of England rescue


The derivatives-based investment strategy that tipped the U.K.’s pension sector into crisis started with good intentions: Help companies fulfill promises they made to employees to pay a steady income through retirement.

Behind the push into that strategy, say pension trustees and their advisers, was the Pensions Regulator, the U.K.’s powerful watchdog, charged with safeguarding the savings of millions of private-sector workers. The regulator steered private pension funds to adopt liability-driven investments, known as LDIs, linked to returns on U.K. government bonds, according to pension trustees and consultants.

The rush into the strategies concentrated risks in the market. It was, analysts say, the financial equivalent of a crowded room during a fire alarm. When government-bond yields

surged, everyone rushed for the exits. The resulting mayhem made the situation even worse and prompted a Bank of England rescue of the bond market.

“The regulator thought that LDI was a virtually zero risk strategy and encouraged schemes to adopt it,” said Robin Ellison, a consultant with the law firm Pinsent Masons and trustee of a number of pension plans. The Pensions Regulator challenged funds that refused to use derivatives or used them sparingly, according to the pension trustees and consultants.

An expanded version of this story is available at

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