MPs are heaping pressure on the Pensions Regulator over its support for risky investment strategies that nearly pushed the industry to the brink last week. The work and pensions committee has written to the watchdog amid concerns that it approved of, and may have even encouraged, the use of popular hedging contracts that magnified the market turmoil caused by the government’s mini-budget and resulted in a £65bn emergency support package by the Bank of England. The committee’s chair, Sir Stephen Timms, asked the regulator whether it had done enough to monitor the risks posed to pension funds, given it appeared to play down reports that the schemes were coming under pressure back in August. He also asked whether the watchdog should have taken “stronger action” before the central bank was forced to step in to avert a pensions crisis last Wednesday. “Many people – including members of defined benefit pension schemes and sponsoring employers – will have been extremely concerned to read about the impact on pension funds of the fall in the price of long-dated government bonds last week,” Timms said in the letter addressed to the Pensions Regulator’s chief executive, Charles Counsell. He said that while the Bank’s intervention “appeared to ease the pressure on schemes, there remains concern at what might happen when this intervention ends on 14 October”. The intervention came after a plunge in the pound and a collapse in UK bond prices last week forced pensions funds into a firesale of assets in order to meet collateral calls on hedging contracts, known as liability-driven investments or LDIs. However, those firesales further depressed prices, subsequently triggering larger collateral calls that prompted fears of a “doom loop” that threatened to drain pension funds of their assets, until the Bank stepped in. LDIs have been widely used by mostly final-salary pension funds managing more than £1.5tn in savings to help hedge against risks in the value of their investments. But some critics claim that those contracts have actually introduced risks into the system, including through increased leverage – where funds borrow money to invest – and collateral calls on those financial contracts. Even the government’s £39bn “lifeboat” scheme for private company pensions, the Pension Protection Fund, was forced to come up with an extra £1.6bn in cash to cover collateral calls on its own LDI contracts last week, it emerged on Wednesday. The Pensions Regulator has been accused of actively encouraging the use of LDIs, with some saying the watchdog even threatened trustees that were too cautious or refused to deploy hedging contracts that they might put retirement money at risk. “Few pension schemes are culpable. In the main, they were cajoled and even threatened if they resisted adopting these strategies,” said Con Keating, a pensions expert and chair of the bond commission of the European Federation of Financial Analysts Societies. Keating said the effect of the Pensions Regulator’s approach to LDIs was evident when comparing private and public pension schemes. Local government pension schemes, which are not overseen by the regulator, rarely use LDIs. The watchdog’s formal guidance states that trustees “may wish to consider” the use of LDIs to manage interest and inflation risks within their schemes. It notes that that “LDI introduces some additional risks, eg around leverage and collateral management, and trustees should understand these and take appropriate steps to manage them.” However, the committee’s letter highlighted a blogpost from the Pensions Regulator that appeared to play down concerns from affected pension firms this summer. “Anecdotally, we hear that some schemes may have been underprepared, after years of falling interest rates in which LDI funds were paying collateral back to schemes,” the regulator said in August. “But we know that advisers were making trustees aware of the risks, and our DB investment guidance covers it too … We remain vigilant to the risks and expect trustees to do the same.” The Pensions Regulator declined to comment on the committee letter but said it would respond in due course.