The UK LDI Crisis, 2022Hard

Pension funds hedged their risk correctly and still nearly failed — because being right at maturity does not pay a margin call on Wednesday.

3 min read · 620 words · Updated 4 Sep 2026

What happened

• Background — UK defined-benefit pension schemes owe payments decades out. To hedge the interest-rate risk of those liabilities they use leveraged gilt and swap positions, freeing capital for return-seeking assets. This is liability-driven investment, and it is sound in principle.
• 23 September 2022 — the UK government announces large unfunded tax cuts. Gilt yields jump sharply; long-dated yields rise by around a hundred basis points within days.
• Immediately — the hedges lose mark-to-market value and generate same-day variation margin calls. Funds sell gilts to raise the cash.
• 26–28 September — that selling pushes yields higher, which triggers larger margin calls, which forces more selling. A textbook spiral.
• 28 September — the Bank of England begins temporary long-dated gilt purchases explicitly for financial-stability reasons, ending the operation in mid-October.

The mechanism

• Variation margin is a liquidity demand, not a valuation. A position can be profitable at maturity and still require cash today (see margin & collateral).
• The only sellable asset was the hedge's own underlying. Pension portfolios held gilts and illiquid private assets; raising cash quickly meant selling gilts — the very thing whose price was falling.
• Everyone faced the same call at the same time, because the strategy was industry-standard. Crowding turned individually rational selling into a market-wide event.
• No step was a mistake in isolation. Every action was contractually correct, which is what makes this a plumbing failure rather than a scandal.

What it teaches

• Model the liquidity of your hedge, not just its correctness. The question is "can I fund the path?", not only "am I right at the end?"
• Collateral waterfalls need pre-agreed, genuinely liquid buffers — sized for a move several times larger than the historical norm.
• Leverage inside a "conservative" strategy is still leverage. The label describes the intention; the margin agreement describes the risk.
• Central banks now treat market plumbing as a stability mandate — an intervention aimed at a spiral, not at the level of rates.

The mechanisms behind this

Every case on this site is an instrument or a mechanism doing exactly what it was built to do, in a situation nobody had pictured. These are the pages that explain the machinery:

• Interest rate swaps — the hedge itself, and why it is right at maturity and expensive on Wednesday.
• Margin & collateral — variation margin is a liquidity demand, not a valuation.
• Government bonds — the only sellable asset, sold into the fall it was hedging against.
• What liquidity costs and what it pays — the cost of being a forced seller of the thing you were right about.