UK pension funds sell assets and tap employers in rush for cash
UK pension schemes are dumping stocks and bonds to raise cash and seeking bailouts from their corporate backers as the crisis in the industry continues to rage a week after the government’s “mini” Budget.
Most of the UK’s 5,200 defined benefit schemes use derivatives to hedge against moves in interest rates and inflation, which require cash collateral to be added depending on market moves.
The sharp fall in the price of 30-year government bonds, triggered by last week’s tax cut announcement, led to unprecedented margin calls, or demands for more cash.
To fund the collateral calls, some pension schemes have resorted to asking employers backing their plans for cash. Outsourcing group Serco provided £60mn after a request from pension trustees, according to a person familiar with the matter, a highly unusual move for a well-funded corporate scheme. Sky News first reported the move.
While some schemes continue to rush to raise cash to fund their derivatives positions, others have had the positions terminated by LDI managers, including BlackRock, leaving them exposed to further moves in rates and inflation.
Natalie Winterfrost, a professional trustee with Law Debenture, said: “There are definitely schemes that were forced out of the game. There are a material number of schemes that will have ended up unprotected, with many more fully unhedged. If gilt yields fall further then their funding positions will deteriorate.”
XPS’s Willis said: “There could be many hundreds of schemes that have had their hedges reduced or removed. This means their funding positions are now much more vulnerable than they were a week ago.”
This story originally appeared on: Financial Times - Author:Adrienne Klasa
