UK’s largest pension scheme was warned against debt strategy before crisis
The UK’s largest private-sector pension scheme increased its exposure to debt-fuelled investment strategies earlier this year in spite of warnings the move would bring “significant risks”.
The £90bn Universities Superannuation Scheme ploughed more of its members’ assets into leveraged hedging, the strategy that was engulfed by crisis last week after a surge in government bond yields prompted an emergency intervention by the Bank of England.
The proposal was spearheaded by USS chief executive Bill Galvin, who prior to joining the plan was head of The Pensions Regulator.
At the height of the gilt crisis last week, thousands of defined benefit pension plans with LDI strategies faced a liquidity crunch due to emergency collateral calls on these contracts as government bond yields spiralled.
USS noted that “from a funding perspective, interest rate rises are having a positive impact”. However, it added that the volatility in the UK market, “clearly driven” by recent government announcements, made it “very difficult to establish a long-term view”.
Renewed scrutiny of USS’s investment strategy, particularly its increased use of leverage, comes as regulators face calls to more strictly supervise the use of leverage by pension funds.
The Pensions Regulator does not currently record in-depth data on the scale of collateral or leverage agreed to by defined benefit schemes, nor does it ask every scheme to provide this data.
This story originally appeared on: Financial Times - Author:Josephine Cumbo
