The Bank of England (BOE) took emergency action on September 28, to avoid a meltdown in the UK pensions sector, unleashing a £65 billion spread over 13 days in a bond-buying programme to achieve UK financial stability.
The country’s pension funds, many of which are big holders of derivative contracts tied to interest-rate moves. The Bank’s intervention will help buy time for the pensions funds to unwind their derivatives positions.
The value of those derivatives, which include things like interest-rate swaps, have plunged alongside bond prices. But because the contracts require investors to post additional collateral as rates move, the losses for pensions
have been amplified. Estimates says that U.K. pension funds have received margin calls for at least £1 billion since Friday’s budget announcement. Roughly two-thirds of the pension plans have been affected.
Pension funds have been forced to sell assets to post collateral with the funds that manage their exposure to rate moves, known as liability-driven investment funds, or LDIs. Roughly £1.5 trillion in assets were held in LDIs in 2020, according
to trade body the Investment Association.
Typically, pension funds have several days to come up with cash once their LDI manager asks for collateral. Now, pension managers are being given hours.
Interest rates on government debt fell after the Bank intervened, with the 30-year bond rate moving from above 5% to below 4%.