The Bank of England told lawmakers that a number of pension funds were hours from collapse when it decided to intervene in the U.K. long-dated bond market last week.

The central bank’s Financial Policy Committee stepped in after a massive sell-off of U.K. government bonds — known as “gilts” — following the new government’s fiscal policy announcements on Sept. 23.

The emergency measures included a two-week purchase program for long-dated bonds and the delay of the bank’s planned gilt sales, part of its unwinding of Covid pandemic-era stimulus.

The plunge in bond values caused panic in particular for Britain’s £1.5 trillion ($1.69 trillion) in so-called liability-driven investment funds (LDIs). Long-dated gilts account for around two-thirds of LDI holdings.

Many LDIs are owned by final salary pension plans, workplace pensions popular in the U.K. that provide a guaranteed annual income for life upon retirement, based on the worker’s final or average salary.

The LDIs needed to liquidate substantial portions of their long-term gilt positions as the values of the bonds fell early last week, and could have done so in an orderly fashion providing gilt prices did not deteriorate too rapidly.

In a letter Wednesday to Conservative Party lawmaker Mel Stride, chairman of the Treasury Select Committee, Bank of England Deputy Governor Jon Cunliffe revealed that LDIs issued dire warnings on the evening of Sept. 27, as 30-year gilt yields rose by 67 basis points from their position that morning. Yields move inversely to prices.

“The Bank was informed by a number of LDI fund managers that, at the prevailing yields, multiple LDI funds were likely to fall into negative net asset value. As a result, it was likely that these funds would have to begin the process of winding up the following morning,” Cunliffe said.

“In that eventuality, a large quantity of gilts, held as collateral by banks that had lent to these LDI funds, was likely to be sold on the market, driving a potentially self-reinforcing spiral and threatening severe disruption of core funding markets and consequent widespread financial instability.”

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