UK pension funds step up fire selling as need for cash soars

LONDON, Oct 11 (Reuters) – British pension schemes are racing to raise hundreds of billions of pounds to shore up derivatives positions before the Bank of England seeks support aimed at keeping them afloat.

The Bank of England plans to stop buying bonds on October 14, leaving pension schemes scrambling to meet a collective fundraising call estimated at at least 320 billion pounds ($355 billion) with no final buyer. appeal.

The central bank made its fifth attempt in just over two weeks on Tuesday to try to restore order to markets, after a spike in yields on September 28 threatened to overwhelm pension schemes that had been burdened leveraged derivatives.

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Pension funds have spent the past two weeks trying to raise cash by selling UK government bonds, or gilts, indexed bonds and corporate bonds, but the fundraising task is intensifying, according to sources.

To make matters worse, providers of so-called liability-driven investment (LDI) strategies are demanding more cash to support new and old hedge positions.

The cash reserves now needed are about three times larger than previously requested, according to four consultants advising pension schemes, as market participants seek larger cushions against larger swings in bond prices.

“This week with the gilt market not having completely calmed down, a lot (of schemes) are now looking at this and saying we need to do a little more and so there is renewed action to get even more guarantees,” said said Steve Hodder, a partner at retirement consultants Lane Clark & ​​Peacock.

Although estimates of the amount pension funds need to sell vary, they are in the hundreds of billions of pounds, and it is unclear how much money has already been raised in cash. Some plans will also reduce their overall exposure to LDI if they cannot meet collateral requirements, the consultants say.

The BoE’s latest intervention on Tuesday was aimed at buying indexed bonds, a much smaller market than gilts, dominated by pension funds and which suffered another big sell-off this week.

The Pensions and Lifetime Savings Association called on the BoE on Tuesday to consider continuing its emergency bond buying program until October 31 “and possibly beyond”.

BoE Governor Andrew Bailey, speaking in Washington later in the day, said: “And my message to the funds involved and all the companies involved in managing those funds. You have three days left now. You have to do it.” LOOKING FOR MONEY

LDI helps plans match their liabilities – what they owe members – with their assets. Pension funds previously put in cash to withstand a swing in government bond yields of 100 to 150 basis points – normally a huge safety net, but that was wiped out by some of the most volatile days on record.

Those collateral cushion claims rose to 300 basis points last week, pension industry consultants and experts said. Some plans have even been asked for 500 basis points this week amid further increases in bond yields, although that amount remains rare.

The £1.6trillion LDI industry cash rush, which has gained popularity among UK defined benefit schemes during a decade of low interest rates, is forcing pension funds to get rid of government and corporate bonds and even get out of less liquid assets such as property and private equity. Investment manager Columbia Threadneedle said on Tuesday it had suspended trading in the £453m CT UK Property licensed investment fund and its feeder fund to restore liquidity.

In another indication of market stress, Barclays said on Tuesday it would make additional liquidity available to its LDI counterparties as part of the BoE’s Oct. 10 launch of an expanded repo facility. The facility allows schemes to store more assets, including low-rated corporate bonds in exchange for cash.


Nikesh Patel, head of client solutions at Kempen Capital Management, calculates that pension schemes must collectively deposit £160 billion of cash as collateral for every potential 100 basis point change in returns.

He estimates that after further volatility in returns over the past two days and in light of higher industry collateral requirements, the total cash holdings now to be posted could be £320bn or more.

“We’re definitely not there yet,” he said, referring to whether the funds were close to raising needed cash by selling assets. He described the past week as “one of the biggest ever for sell orders. You see more selling this week.”

The increased need for collateral was driven by pressure from BoE-led regulators to avoid further strain on the system, said Hemal Popat, partner, investments at Mercer.

He estimates that pension funds could sell assets totaling around £300bn as they adjust their hedging positions, although it is unclear how much they have already sold. He estimated that £100 billion could come from gilts and the rest from assets such as global credit, global equities and asset-backed securities.

The BoE declined to comment further.

Leading providers LDI Legal & General Investment Management and Insight Investment did not respond to requests for comment.

Liquidity in government bond markets remained poor and yields are likely to rise further whether or not the BoE extends its bond purchases on Friday, said Craig Inches, head of rates and cash at Royal London Asset Management. .

“Ultimately, many systems need to rebalance their portfolios,” he said. “It’s not going to stop and it will take time.”

($1 = 0.9007 pounds)

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Reporting by Tommy Reggiori Wilkes and Carolyn Cohn, editing by Sinead Cruise and David Evans

Our standards: The Thomson Reuters Trust Principles.


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