Those who modelled the risk did not think Tories would do anything that stupid and risk the UK economy.
Pension funds are supposed to run for decades. Looking at the last 12 decades, I see many financial crises, a run on the pound, the Great Depression, a couple of world wars and so on. All of which were unthinkable until they happened. Any risk model meant to cover long periods should account for the possibility of similarly extreme events happening in the future, at roughly the historical frequency.
But you're telling me that those who modeled the risk failed to give this ANY consideration at all?? And then you say that you think that this oversight is not an error??
I'm going to have to very emphatically disagree!
Margin calls are nothing special. Derivatives are used for balancing assets and liabilities, since you cannot match the cash flows on pensions directly given the very long duration (cash flows for pension funds run for nearly a century). Swaptions etc are nothing evil. They are pretty clear cut tools for the job of limiting interest rate exposure for parties with very long liabilities.
This is not a pension fund problem (I agree up front: that's a reductio nearly ad absurdum), it's an employer and pensioner problem, created by a sudden loss in confidence in UK gov in an already very turbulent market. If sterling falls, purchasing power falls, interest rises, there is no way pensions can keep purchasing power or indexation. Margin calls are a tiny symbol that shouldn't worry a risk manager. It's the larger enviroment for the UK - that is very worrying.
It's all hocus pocus but a well run insurer or pension fund should have a pretty solid grasps on interest rates and a pretty low exposure to swings in that rate. Same for FX exposure. End of '21 you should have opened up some upward potential in interest rates and have some room to survive that volatility. The best managed ones keep afloat or even profit, without taking too many excess risks. The worst managed ones are the first to fall. Go and look at the Q3 financial results for the largest _worldwide_ insurers. I predict the largest insurers will show stronger financial capital positions. (Stocks will fall since large insurers are partially valued on general stock market performance since they are in essence also investment companies.)
Again, margin calls are a symptom caused by the underlying agreements, with not a direct relationship to which ones will fail or prosper.
He did leave me with the impression that tnterest rate modeling was technically challenging and had lots of scope for sophisticated work - so that's where the effort went.