itstargetnews
By Carolyn Cohn and Iain Withers
LONDON (Reuters) – Asset managers are urging some British pension funds to raise more cash to support their hedging positions after a recent jump in borrowing costs, but pension advisers said to Reuters this week that the market was behaving in an orderly fashion.
XPS and Gallagher said some funds had been instructed to post more cash to maintain derivatives positions they hold through so-called liability-driven investment (LDI) strategies.
BlackRock, a major LDI provider, said in a note to clients on Friday that while higher borrowing costs will have reduced the resilience of pension plan guarantees, funds were better prepared than before to withstand volatility .
The market moves are the first major test of the pension market since an industry review of the use of LDI to reduce risk and meet regulatory demands for more collateral and less leverage. Derivatives will require more collateral against them to offset the price movement.
LDI, which helps funds meet future payments by hedging against movements in bond yields, was at the center of a crisis in September 2022 when then-prime minister Liz Truss’ government plans to unfunded tax cuts boosted yields.
Pension advisory firms XPS and Gallagher, along with six other industry players, said the market had responded in an orderly manner to this week’s sharp sell-off in debt markets.
The Bank of England and the Pensions Regulator declined to comment on Friday.
The yield on 30-year British government bonds, known as gilts, hit a new 26-year high on Friday as higher inflation expectations and worries about Donald Trump’s imminent arrival in the White House boosted investors to sell.
Ten-year gilt yields rose 25 basis points, their biggest weekly jump in a year, but far less than the nearly 70bp weekly jump seen in 2022.
BlackRock, a big player in LDI services along with Legal & General and Insight Investment, said in its note explaining the sale that pension plans were starting from a different place than in previous years.
However, it was “vital” that they continued to monitor their safeguards, the firm added.
Spikes in yields following the Truss government’s 2022 “mini-budget” led to collateral calls on funds’ hedging positions, forcing operators to sell assets to raise cash.
“If yields rose materially, then you could see things getting stress-tested again. But we’re confident the industry is in a much better place,” said Carl Hitchman, chief investment officer at Gallagher Benefit Services UK .
