# British pensions step up multi-billion-pound asset fire sale as need for cash soars
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-10-11
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: UK Pension Schemes Scramble to Shore Up Derivatives Positions
Meta Description: With the Bank of England halting bond purchases, UK pension schemes are scrambling to raise billions, facing challenging derivatives positions and higher cash
URL: https://financedigest.com/british-pensions-step-up-multi-billion-pound-asset-fire-sale-as-need-for-cash-soarshtml

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By Tommy Wilkes and Carolyn Cohn

LONDON (Reuters) – UK pension schemes are racing to raise hundreds of billions of pounds to shore up derivatives positions before the Bank of England calls time on support aimed at keeping them afloat.

The Bank of England plans to stop buying bonds on Oct. 14, leaving pension schemes scrambling to meet a collective cash call estimated to be at least 320 [billion pounds](https://www.financedigest.com/shell-to-evaluate-25-billion-pound-british-investments-after-windfall-tax.html "Shell to ‘evaluate’ 25 billion pound British investments after windfall tax") ($355 billion) without a buyer of last resort.

The central bank on Tuesday made its fifth [attempt in just over two weeks to try and restore order in markets](https://www.financedigest.com/jittery-markets-attempt-risk-on-rally-while-waiting-for-powell.html "Jittery markets attempt risk-on rally while waiting for Powell"), after a surge in yields on Sept. 28 threatened to overwhelm [pension schemes](https://www.financedigest.com/how-britains-pension-scheme-hedge-became-a-trillion-pound-gamble.html "How Britain’s pension scheme hedge became a trillion pound gamble") that had loaded up on leveraged derivatives.

Pension funds have spent the past two [weeks trying to raise cash by selling](https://www.financedigest.com/this-is-the-best-week-for-cash-savvy-iphone-fans-to-sell-their-6s-models.html "This is the best week for cash-savvy iPhone fans to sell their 6s models") off UK government, index-linked and corporate bonds but the fundraising task is intensifying, sources say.

Compounding the pain, providers of so-called liability-driven investment strategies (LDI) are demanding more [cash to support](https://www.financedigest.com/supporting-a-fair-and-resilient-society-by-protecting-access-to-cash.html "Supporting a fair and resilient society by protecting access to cash ") new and older hedging positions.

The cash buffers now required are about three times bigger than previously requested, according to four consultants advising pension schemes, as market players [seek bigger cushions against more volatile moves in bonds](https://www.financedigest.com/investors-seek-higher-returns-as-catastrophe-bond-issuance-slows-during-q2-according-to-aon-study.html "INVESTORS SEEK HIGHER RETURNS AS CATASTROPHE BOND ISSUANCE SLOWS DURING Q2, ACCORDING TO AON STUDY").

This week with the gilt market not fully calmed, lots (of schemes) are now looking at this and [saying we actually need](https://www.financedigest.com/europe-power-firms-need-1-5-trillion-euros-in-margin-calls-equinor-says.html "Europe power firms need 1.5 trillion euros in margin calls, Equinor says") to do a bit more and so there is renewed action to get even more collateral across,” said Steve Hodder, a partner at pension consultants Lane Clark & Peacock.

Estimates of how much pension [funds need](https://www.financedigest.com/need-additional-funding-but-not-sure-how-to-go-about-it.html "Need additional funding but not sure how to go about it?") to sell range but are in the hundreds of billions of pounds, although it is not known how much in assets schemes have sold already. Some schemes will also be cutting their LDI exposure if they can’t [meet the collateral demands](https://www.financedigest.com/meeting-both-operational-and-customer-demands-how-insurance-can-adapt-in-a-disrupted-world.html "Meeting both operational and customer demands – how insurance can adapt in a disrupted world"), consultants say.

The latest BoE intervention on Tuesday was targeted at buying bonds in the index-linked market, a far smaller market than gilts, dominated by pension [funds and which suffered another significant selloff this week](https://www.financedigest.com/rate-rise-fears-prompt-third-week-of-global-equity-funds-outflows.html "Rate rise fears prompt third week of global equity funds outflows").

The Pensions and Lifetime Savings [Association on Tuesday called for the BoE to consider](https://www.financedigest.com/over-half-of-organisations-would-consider-using-cryptocurrencies-for-business-transactions-though-8-in-10-acknowledge-the-increased-risk-of-associated-ddos-attacks.html "Over half of organisations would consider using cryptocurrencies for business transactions, though 8 in 10 acknowledge the increased risk of associated DDoS attacks") continuing its emergency bond-buying programme to Oct. 31 “and possibly beyond”.

LDI helps schemes match their [liabilities – what they owe members – with assets](https://www.financedigest.com/decoding-balance-sheets-analyzing-assets-liabilities-and-equity.html "Decoding Balance Sheets: Analyzing Assets, Liabilities, and Equity"). Pension funds were previously putting up cash to withstand a move in government [bond yields of 100 to 150 basis points — normally a huge](https://www.financedigest.com/investors-flee-uk-bonds-pushing-gilts-to-huge-monthly-loss.html "Investors flee UK bonds, pushing gilts to huge monthly loss") safety net, but which has been wiped out by some of the most volatile days on record.

Those collateral buffer [demands increased](https://www.financedigest.com/increasing-consumer-adoption-to-fuel-demand-for-automotive-gear-oil-market.html "Increasing Consumer Adoption to Fuel Demand for Automotive Gear Oil Market") to 300 basis points last week, consultants and pension industry experts said. Some schemes have even been asked for 500 basis points this [week amid more jumps in bond](https://www.financedigest.com/shares-and-bonds-nervy-as-rate-hike-week-looms.html "Shares and bonds nervy as rate-hike week looms") yields, although that amount remains rare.

The scramble for cash in the 1.6 trillion pound LDI industry, which [soared in popularity among Britain’s](https://www.financedigest.com/britain-delays-major-rail-project-hs2-as-costs-soar-again.html "Britain delays major rail project HS2 as costs soar again") defined benefit schemes during a decade of low interest rates, is forcing pension funds to dump government and corporate bonds and even to exit from less liquid assets such as property and private equity.

In an [indication of market](https://www.financedigest.com/alternative-finance-market-in-robust-health-despite-camfi-indicating-slight-downturn.html "Alternative finance market in robust health, despite CAMFI indicating slight downturn") stress, Barclays said on Tuesday it would make extra liquidity available to its LDI counterparties as part of the BoE’s Oct. 10 [launch of an expanded](https://www.financedigest.com/coindesk-expands-with-launch-of-coindesk-productions.html "CoinDesk Expands With Launch of CoinDesk Productions") repo facility. The facility allows schemes to park more [assets including low-rated corporate bonds](https://www.financedigest.com/analysis-watch-out-risk-assets-the-rout-in-bonds-is-coming-your-way.html "Analysis-Watch out risk assets, the rout in bonds is coming your way") in return for cash.

HOW MUCH MORE?

Nikesh Patel, head of client solutions at Kempen Capital Management, calculates that pension schemes collectively [need to post](https://www.financedigest.com/do-you-need-to-buy-guest-post-services-why.html " Do You Need to Buy Guest Post Services? why?") 160 billion pounds of cash as collateral for every potential 100 basis point move in yields.

He estimates that after further volatility in yields in the past two days and the industry’s higher collateral requirements, the total cash [funds now need](https://www.financedigest.com/55-of-uk-smes-unable-to-access-all-funding-needed-to-grow.html "55% of UK SMEs unable to access all funding needed to grow") to post could be 320 billion pounds or higher.

We are definitely not there,” he said, referring to whether [funds were close to raising the required cash by selling](https://www.financedigest.com/intercos-fund-shareholders-l-catterton-otpp-sell-6-stake-at-7-discount.html "Intercos fund shareholders L Catterton, OTPP sell 6% stake at 7% discount") assets. He described last week as “one of the [biggest ever](https://www.financedigest.com/the-biggest-ever-shake-up-of-insurance-law-is-finally-here-wellalmost.html "The biggest ever shake up of insurance law is finally here! Well…Almost.") for sell orders. You are [seeing more sales](https://www.financedigest.com/switzerlands-clariant-sees-slight-sales-drop-in-2023.html "Switzerland’s Clariant sees slight sales drop in 2023") this week.

The increased [need for collateral was driven by pressure from regulators](https://www.financedigest.com/regulators-need-to-strike-the-balance-between-protection-and-strangulation.html "REGULATORS NEED TO STRIKE THE BALANCE BETWEEN PROTECTION AND STRANGULATION") led by the Bank of England to prevent further stresses on the system, said Hemal Popat, partner, investments at Mercer.

He estimates pension funds could [sell assets](https://www.financedigest.com/uks-cineworld-to-not-sell-assets-individually-denies-talks-with-amc.html "UK’s Cineworld to not sell assets individually, denies talks with AMC") totalling around 300 billion pounds as they adjust hedging positions, although it is not clear how much they may have sold already. He estimated 100 billion [pounds could come from gilts](https://www.financedigest.com/the-pound-gilts-and-stocks-likely-winners-and-losers-from-uk-budget.html "The pound, gilts and stocks: likely winners and losers from UK budget") and the rest from assets such as global credit, global equities and asset-backed securities.

The BoE declined to comment further.

Leading LDI providers Legal & General Investment [Management](https://www.financedigest.com/french-watchdog-fines-h2o-asset-management-executives-over-tennor-investments.html "French watchdog fines H2O Asset Management, executives over Tennor investments") and Insight Investment did not respond to requests for comment.

Liquidity in government bond markets remained poor, and yields were likely to climb further whether the BoE extended its bond-buying on Friday or not, said Craig Inches, [Head of Rates and Cash at Royal London](https://www.financedigest.com/new-york-catches-up-with-london-to-head-citys-global-centres-survey.html "New York catches up with London to head City’s global centres survey") Asset Management.

The [bottom lime is a lot of schemes needs](https://www.financedigest.com/finance-innovation-needs-to-be-driven-from-the-top-and-supported-from-the-bottom.html "Finance innovation needs to be driven from the top, and supported from the bottom") to rebalance their portolios,” he said. “That is not going to stop and will take time.”

($1 = 0.9007 pounds)

(Reporting by Tommy Reggiori Wilkes and Carolyn Cohn, Editing by Sinead Cruise and David Evans)


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