Oct 10, 2022
Pension Funds at Center of Gilt Rout Get New Way to Tap BOE Cash
, Bloomberg News
(Bloomberg) -- The Bank of England will lend against a wider range of assets, including corporate bonds, in a fresh measure to try to avoid the vicious cycle that hit UK pension funds in recent weeks.
The BOE said Monday it will launch a Temporary Expanded Collateral Repo Facility, or TECRF, that will run until Nov. 10 to help banks ease pressure on the so-called liability-driven investment strategies that many pensions use. Banks could therefore accept more types of assets as collateral from the LDI funds and turn to the BOE to convert those assets into cash.
UK pension fund managers deploying LDI strategies got trapped in a brutal cycle after the government’s mini budget of unfunded tax cuts triggered a gilt selloff. The funds had to put up additional collateral on derivatives trades because government bond prices were plunging, and to raise cash they sold bonds, which sent prices down further, forcing them to put up more collateral. That forced the BOE to originally pledge £65 billion of emergency intervention on Sept. 28.
LDI is a strategy popular with defined-benefit pension plans, which guarantee retirees a fixed payout regardless of swings in financial markets. Many pension funds use derivatives to help keep their assets and liabilities balanced. Typically, the funds hold derivatives that gain value when interest rates go down and lose value when they rise. Under the terms of those derivatives contracts, when the value falls, the funds can face margin calls, or demands to put up more collateral.
The repo loans will initially be for 30 days but can be rolled over, the BOE said. The central bank also said Monday it would double the size of its auctions to purchase long-dated UK government bonds to £10 billion ($11 billion) a day until it ends on Oct. 14.
Individual pension funds have been rushing to sell billions of pounds worth of assets to rebuild their cash buffers before the BOE removes its market support. Individual pension funds are each selling tens or hundreds of millions of pounds of liquid assets to boost their reserves, pension consultants with knowledge of the transactions said last week.
There are around 5,500 so-called defined benefit schemes in the UK, according to The Pensions Regulator, managing £1.8 trillion. Although not all of them have become forced sellers, scores of them are selling, according to the consultants.
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