Bank of England

The Bank of England
The Pensions Regulator has for the first time been drafted into high-level emergency talks led by the Treasury and Bank of England as they examine measures to calm financial markets in the wake of the meltdown which followed Kwasi Kwarteng's mini-budget.

The watchdog, which oversees the £1.5tn pension sector, is understood to have been summoned into closed-door meetings of the Authorities' Response Framework (ARF), which are triggered when an "incident or threat" could cause major disruption to 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 intervene with a £65bn bond-buying programme in order to avoid a pensions crisis.

The secretive ARF was established in response to the 2007/8 financial crisis. It is meant to be a forum for top Treasury officials and key City regulators - the Bank of England and Financial Conduct Authority - to address threats to financial stability.

It is understood this is the first time the Pensions Regulator - led by industry veteran Charles Counsell - has taken part, highlighting the scale of the crisis that led to the Bank of England's intervention.

Experts said that 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 that have been blamed for magnifying last week's crisis is also being examined.

Those products - known as liability-driven investments or LDIs - have been widely used by mostly final-salary pension funds managing more than £1.5tn in savings to help hedge against swings in the value of some of their investments.

However, a plunge in the pound and a collapse in UK bond prices triggered calls on fund managers to provide more collateral on those complex contracts, meaning they had to sell assets to come up with cash at short notice.

But those fire sales further depressed prices, causing more volatility in the value of their assets. That, in turn, triggered larger collateral calls, sparking a much-feared "doom-loop", and creating concern about a drain on pension fund assets.

Con Keating, chair of the bond commission of the European Federation of Financial Analysts 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 involves ensuring that schemes cannot indulge in the practices that led us to this," he said. He added that authorities should give funds six months to a year to unwind their current LDI contracts.

Keating said the Pensions Regulator itself should also be questioned over why it allowed the use of these hedging contracts. "I can only hope that they can also recognise the central role that the Pensions Regulator had in promoting those arrangements within our pension schemes."

He said he was concerned that the regulator would advise against a ban on LDIs, in order to avoid tarnishing its reputation.

The Bank of England and the Treasury declined to comment. A spokesperson for the Pensions Regulator declined to comment on the meetings but said it was "monitoring the situation in the financial markets closely to assess the impact on defined benefit pension scheme funding".