British pension funds are selling assets and attacking employers in a hurry for cash

UK pension schemes are selling stocks and bonds to raise money and seeking bailouts from their corporate backers as the crisis rages in the industry a week after the government’s ‘mini’ budget.

Most of the UK’s 5,200 defined benefit plans use derivatives to hedge against interest rate and inflation movements, which require cash collateral to be added depending on market movements.

The sharp fall in 30-year Treasury bond prices, triggered by the announcement of tax cuts last week, led to unprecedented margin calls or calls for more cash.

To raise the funds, pension funds sold assets – including government bonds or gilts – causing prices to fall further. The Bank of England intervened to buy gilts on Wednesday and stabilized the market, but pension funds continue to sell assets to meet cash demands.

“There’s a lot of trouble out there, a lot of forced sales,” said Ariel Bezalel, fund manager at Jupiter. “People who get margin calls need to sell what they can, not what they would like to.”

He said the BoE’s intervention helped push longer-dated bond yields lower, but other assets such as corporate bonds remained “under pressure” as pension schemes “had to liquidate assets”. He added: “We see really high quality investment grade paper coming our way. . . Names like Heathrow, John Lewis, Gatwick, BT – solid fundamentals – to raise money.”

Sterling-denominated high-quality corporate bonds have come under heavy selling pressure, with yields up 1 percentage point to 6.58 per cent since the UK’s fiscal package announcement, according to an index by Ice Data Services. Yields are up 1.63 percentage points this month, the largest rise on record.

Ice BofA Sterling Corporate Index line chart showing mini-budget putting more pressure on sterling corporate bonds

Christian Kopf, head of fixed income fund management at Union Investment, said the €416 billion wealth manager was able to source sterling-denominated debt such as Telefónica bonds “at a bargain price”. Telefónica’s debt matures at the end of this year, meaning it is very low risk, yet it has been priced at a discount due to “panic selling”. [UK] pension funds,” he said.

“Some people lost money, but it was our gain,” added Kopf.

Ross Mitchinson, co-CEO of UK brokerage Numis, said: “There have been forced sales of everything – stocks as well as bonds.” The domestically focused UK FTSE 250 is down more than 5 percent this week.

Some managers of the so-called liability-oriented investment strategies require more cash to fund the same derivatives position on the fly for security reasons. The largest managers include Legal and General Investment Management, BlackRock and Insight Investment.

To fund the collateral calls, some pension schemes have taken to asking employers to support their plans with cash. Outsourcing group Serco provided £60m following a request from pension managers, according to a person familiar with the matter, a highly unusual move for a well-funded corporate scheme. Sky News first reported on the move.

Andrew Lewis, chief financial officer of aerospace group Chemring, said the company’s pension fund sold its entire holdings of shares three weeks ago in anticipation of trouble. “We saw Gilt yields shoot up. . . and you never want to be a forced seller of a liquid asset at low valuations. We sold our entire equity interest as we predicted there would be margin calls on the LDI.”

While some schemes continue to rush to raise cash to fund their derivatives positions, others have had their positions exited by LDI managers, including BlackRock, leaving them exposed to further interest rate and inflation movements.

Natalie Winterfrost, a professional fiduciary at Law Debenture, said: “There are definitely plans that have been sidelined. There are a significant number of systems that ended up being left unprotected, and many more are completely unprotected. If gilt yields continue to fall, their funding positions will deteriorate.”

Simeon Willis, Partner at XPS Pensions Group, said: “There could be many hundreds of schemes that have had their protections reduced or removed. This means their funding positions are now much more vulnerable than they were a week ago.”

Although pension funds are still reacting hastily to the extreme market conditions, the situation is still calmer than before the BoE’s intervention this week.

However, many are worried about what would happen after the central bank’s burst of asset purchases, which is due to end on October 14.

David Fogarty of Dalriada, a firm of professional fiduciaries, said: “We as a firm remain concerned that when the clock runs out for the end of the intervention committed by the BoE we may see a repeat of events and are determined to try to ensure the chaos that ensued earlier this week is not repeated.”

Additional reporting by Katie Martin British pension funds are selling assets and attacking employers in a hurry for cash

Adam Bradshaw

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