The Bank of England will soon stop buying bonds, leaving pension schemes scrambling to meet a cash call of about £320bn by selling off gilts
The Bank of England will soon stop buying bonds, leaving pension schemes scrambling to meet a cash call of about £320bnFILE PHOTO: A general view of the Bank of England building in London, Britain, August 4 2022. Picture: REUTERS/MAJA SMIEJKOWSKA
On Tuesday, the central bank made its fifth attempt in just over two weeks to try to restore order in markets, after the yield surge on September 28 threatened to overwhelm pension schemes that had loaded up on leveraged derivatives. “This week with the gilt market not fully calmed, lots [of schemes] are now looking at this and saying, we actually need 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.
The Pensions and Lifetime Savings Association on Tuesday called for the BOE to consider continuing the bond-buying programme to October 31 “and possibly beyond”. “GBP rose on the news and is currently trading at the 1.1000 mark, but that appears to be a sort of limbo level where markets are awaiting more clarity on this theme,” he said in a note.LDI helps schemes match their liabilities — what they owe members — with assets. Pension funds were previously putting up cash to withstand a move in government bond yields of 100 to 150 basis points , normally a huge safety net, but which has been wiped out by some of the most volatile days on record.
In another indication of market stress, Barclays said on Tuesday it would make extra liquidity available to its LDI counterparties as part of the BOE’s October 10 launch of an expanded repo facility. The facility allows schemes to park more assets, including low-rated corporate bonds, in return for cash.
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