Next chief Wolfson says he flagged LDI concerns to Bank of England

The head of Next has said the UK retailer warned the Bank of England that an investing strategy that plunged the country’s pension funds into crisis this week was a “time bomb”.

“We are not exposed to liability-driven strategies despite multiple sales pitches and we have previously written to the Bank of England outlining our concerns about them,” Lord Simon Wolfson, who is a Conservative peer, said on Thursday.

Over the past decade, pension funds have turned to so-called liability-driven investment (LDI) strategies to help match their liabilities with their assets, often using derivatives.

The investing strategy was at the heart of yesterday’s turmoil in the government bond market, which has been building since the UK government’s mini-Budget alarmed investors with its plan for unfunded tax cuts.

With pension funds facing margin calls tied to LDI, the Bank of England on Wednesday launched a £65bn plan to stabilise the government bond market. Wolfson said that LDI strategies had “always looked like a time bomb waiting to go off”.

The amount of liabilities held by UK pension funds that have been hedged with LDI strategies has tripled in size to £1.5tn in the 10 years to 2020, according to the Investment Association.

Wolfson said that the retailer had written to the central bank in 2017 and believed it had received a reply.

The retailer, who was speaking at a press conference to announce the group’s latest results, described the strategies as “an extreme example” of a wider trend designed to eliminate all risk from pension funds.

Switching into safer bonds, as many funds had done over the past two decades, “reduces the volatility of the fund valuation, but our view is that in the long term it does not reduce the risk”.

Many funds that had gone into bonds “are actually taking a lot more risk than they thought they were”, he added.

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