Sarah Breeden: The building blocks of resilience

Speech by Ms Sarah Breeden, Executive Director for Financial Stability Strategy and Risk of the Bank of England, at the Westminster Business Forum policy conference, London, 16 June 2023. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

Central bank speech  | 
19 June 2023

Pension funds have an enormous responsibility in ensuring that pension obligations are honoured while also playing a vital role in facilitating the flow of savings into investment, including funding productive finance and climate resilience. And they are key players in the gilt market which is vital to the functioning of sterling financial markets more broadly. On all these grounds, pension fund resilience is a key financial stability issue, which will be the topic of my speech today.

I suspect I don't need to remind this audience of what happened last autumn. You will all remember how poorly managed leverage at some liability-driven investment (LDI) funds amplified a sudden repricing of assets following the Government's growth plan, creating a self-reinforcing price spiral in the long-end of the gilt market. The Bank of England (Bank) then undertook a targeted intervention in the gilt market in order to deliver our financial stability objective, buying time for LDI funds to build their resilience. 

Even that brief reminder may have been enough to send hearts racing. I won't use any more of this speech today to look backwards. For those that do want to dig deeper, I'd like to briefly plug a speech by my colleague Jon Hall, which will cover the risks of leverage including in LDIs next week.

What I'd like to do instead is explain what the Financial Policy Committee (FPC) is doing to build steady state resilience in LDI funds and what needs to be done by pension funds to ensure risks to financial stability are reduced.

Then I'll look forwards to how the FPC might use this framework for steady state resilience in LDI funds to build resilience throughout the system of market-based finance in the future.