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Following the “mini-budget” of 23 September, UK gilt yields rose, prices fell and pension funds with LDI arrangements received multiple and large collateral calls. Pension funds were forced to sell gilts – causing asset prices to fall – and other illiquid assets, and some even sold illiquid assets at a steep discount. The Bank of England intervened on 28 September, pledging to buy billions of pounds of long-dated gilts, stabilizing the situation.
A written submission by BT Pension Scheme, London, dated November and published this month on the WPC website, said the £47 billion ($56.8 billion) pension fund had sold cash, gilts and equities to meet liquidity demands.
The pension fund met all its collateral calls without selling inflation-linked gilts “and without recourse” to its corporate sponsor, BT Group.
However, BTPS “has become more cautious about how we manage the liquidity of the scheme and (it) has increased the collateral buffer that we operate on. This will better position the scheme to weather any further volatility in the gilt market but will also reduce the expected returns. from our assets.” A spokeswoman for in-house manager BT Pension Scheme Management now declined to comment on the yield assumption used to calculate its collateral buffer.
The BTPS aims for self-sufficiency by 2034, and warned that “if expected returns fall below this level the plan may require more support than previously anticipated at future valuations.”
On Wednesday, consultants and LDI managers gave oral evidence to the WPC on the LDI topic.
Karin Rosenberg, CEO of UK fiduciary manager Cardano Investments, which uses LDI solutions as part of its OCIO arrangement, warned that “there’s a trade-off between how secure the collateral buffer is and what return you can get on growth assets. And you The more you grow in collateral, the less you invest in growth. At 400 basis points, at 4%, there are going to be some pension funds that have to go back to the drawing board and reevaluate their strategies, and at 4%-type buffer levels they His growth ambitions may have to be scaled back. And the money his sponsors have to put in will have consequences.”
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