The upside of a gilt market crisis
It sounds reasonable to infer from recent events that UK pension schemes are in a pretty dark place. Their leverage has played a catalytic role in the Bank of England’s sequential emergency interventions. It might even be true of the unlucky few who were whipsawed by misbegotten derivative design and the BoE’s intervention.
But if you tilt your head just so, systemwide funding ratios have rarely looked better.
The present value of UK pension fund liabilities tend to be calculated with reference to long dated bond yields (from an accountancy, regulatory and management perspective). This is one of the founding principles on which LDI has been built. By taking economic exposure to assets which move in line with the present valuation of liabilities, so pension funds can reduce the volatility of their funding deficits.
This story originally appeared on: Financial Times - Author:Tax Cognition
