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How did a pension safety strategy help destabilise Britain's government-bond market in 2022?
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In late September 2022, a strategy intended to make British pensions safer helped destabilise the market for UK government bonds, known as gilts. Sharp falls in gilt prices exposed weaknesses in leveraged liability-driven investment (LDI) funds used by defined-benefit pension schemes, prompting temporary Bank of England intervention. These schemes promise future pension payments; LDI aims to make investment values move more closely with the value of those commitments. The catch was leverage: using borrowing to increase investment exposure meant that managing long-term pension risk could create an urgent need for cash.
When bond prices fall, yields rise. Leveraged funds can then face demands for additional —assets pledged as security. Without fresh capital, they may have to sell assets to raise cash, pushing prices lower and triggering further pressure. What looks for an individual fund can therefore across a market. Researchers in a Bank of England staff working paper estimate that forced LDI selling produced gilt-price discounts of roughly 10%, accounting for approximately half of the total decline they studied during September–October 2022. Selling was not simply a reaction to the shock; it amplified it.
The distinction is between meeting obligations over time and having cash available when it is demanded. A liquidity squeeze does not automatically mean a pension scheme is insolvent, but it can transmit stress to other investors. In March 2023, the Bank's Financial Policy Committee recommended a minimum resilience standard for LDI funds. The wider relevance persists: the Bank reported that gilt trading volumes during early April 2025 volatility were the highest since the September 2022 LDI episode. That does not establish another LDI crisis. It shows why government-bond markets warrant attention—and why individual safeguards must be judged by their collective effects.