The BT pension scheme will be hit with £11bn after the mini-budget

Huge BT pension fund suffered a £11bn loss as its investments were rocked by market turmoil triggered by the government’s ‘mini’ budget.

The former monopoly’s defined-benefit pension scheme, one of the country’s largest, said Tuesday that “significant market volatility in the second half of September” caused the scheme’s assets to fall by around $11 billion between September 23 and 28.

At the end of June, BTPS’ net worth was £47 billion, suggesting it’s down by more than a fifth to £36 billion. BT Group did not have to provide cash to offset the fall in value of plan assets.

“While the value of the program’s assets has declined over this period, our estimated funding position has not deteriorated,” BTPS Chief Executive Officer Morten Nilsson said in a statement accompanying Tuesday’s annual report.

BT was one of thousands of UK pension schemes to employ liability driven investment (LDI) strategies to protect the scheme’s finances from adverse interest rate movements and inflation.

The government’s announcement of £45bn of unfunded tax cuts sent investors shying away from the UK sovereign debt, sending gilt yields higher. The BoE then came in on September 28 by announcing it would buy up to £65bn worth of gilts to stem the sell-off.

Rising gilt yields lead to a fall in system liabilities. However, with this approach, systems that have hedged interest rate risk through gilts or derivatives will also see their gilt assets decline.

The decline in assets followed a year in which the scheme’s assets had already fallen by £10.4bn, which BTPS attributed to “the performance of our liabilities-backing assets”, which matched an earlier rise in gilt yields .

After the year-end, another significant fall in the value of the scheme’s assets occurred during a period of significant market volatility in the second half of September, BTPS said.

“Prior to the Bank of England’s intervention in the gilt market, there was an estimated £11 billion fall in the value of the scheme’s assets,” BTPS said. “Our hedges have continued to perform as expected and as of the signing date our estimated funding position has not deteriorated.”

Nilsson said the program’s use of interest rate and inflation swaps — financial instruments designed to protect against sharp changes in interest rates — have kept the program’s financial position stable.

The scheme’s hedges helped significantly reduce the scheme’s funding deficit, which has fallen from £8bn in 2020 to £4.4bn this year.

“Today’s statement is comfort that the hedging strategies are working as intended and that the program remains satisfied with its funding strategy,” Jefferies analysts wrote.

BTPS runs its LDI program in-house, which has helped it respond quickly to market volatility.