Champagne Flows at Pension Gathering in Midst of a UK Crisis
Comment of the Day

October 14 2022

Commentary by Eoin Treacy

Champagne Flows at Pension Gathering in Midst of a UK Crisis

This article from Bloomberg may be of interest to subscribers. Here is a section:

Margin calls for more collateral are still coming through, though at a less aggressive pace than two weeks ago, according to market participants, who asked not to be identified. Funds are still selling assets to meet them, managers are trying to lobby the BOE, everyone is bracing for next week when the central bank support has gone, they said. 

Many funds are making tough choices in the run up to the deadline. Almost daily they have been having to decide whether to dump assets to raise cash for possible future margin calls, which would weigh on returns; reduce their LDI positions, which would leave them more exposed if rates turn back around; or find other ways to get some cash.

Some have asked the corporates, whose employees pensions they manage, for emergency short-term loans so they don’t have to sell prized assets. Others have agreed that the companies could accelerate already-agreed payments they would have made to their pension schemes over several years, according to consultants, who asked not to be identified discussing their clients. This means some companies have been stumping up large one-off payments to their pensions, the people said.

“For instance, if they had a pre-agreed payment plan to put in cash on a monthly schedule, some have decided to make an advanced contribution equivalent to one year’s deficit recovery payment,” Norbert Fullerton, a partner at Lane Clark and Peacock said.

“Across the industry there are schemes that can’t raise enough cash and have had to reduce their leverage and hedge ratios,” he said. “It’s an unfortunate situation to be in but some don’t have sufficient liquid assets to sell.”

Eoin Treacy's view

Every pension fund has been faced with the same challenge. They need an assumed return of 7-8%. When bond yields collapsed and stayed down for a decade, the scope for compounding disappeared. Quantitative easing was often described as favouring traders at the expense of savers and the dilemma faced by pensions is a vivid example of that.

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