During the period following 23 September announcements related to the Government’s growth plan, it was important, and welcome, that the Bank stepped in to restore orderly market conditions in line with its financial stability objective.
As the Bank has acknowledged, the historically high speed of repricing and market moves were unprecedented and it has also recognised that, in some cases, even prudent risk management practices or regulatory stress tests were insufficient to manage the resulting volatility. This turbulence put significant stress on the gilt market and resulted in rapid and spiralling collateral calls for some defined benefit funds using LDI strategies.
The Bank’s early intervention was generally effective, with far lower levels of gilts being purchased than provided for – around £5bn out of a facility of up to £65bn. Recent days have, however, shown that market confidence remains low.
The PLSA has been supporting its members and engaging with regulators to help manage the situation.
We continue to encourage all pension funds and service providers to use this period to take further steps to re-balance portfolios and ensure necessary measures are in place to protect their strategies in uncertain times.
Going forward, we will continue to work with relevant authorities to understand any lessons learned and to ensure the LDI market, which in general has provided UK schemes and UK Plc with significant amounts of stability over the last 20 years, remains resilient and effective. LDI is intended as a tool to manage risk and ensure pensions are paid when due with minimum volatility for the funders of the scheme.
Our analysis suggests that the majority of pension funds used LDI in a prudent manner and with sensible arrangements to meet calls for collateral if normal market conditions, or those under prudent stress scenarios, prevailed. Over the last couple of weeks, pension funds also have taken steps to strengthen further their financial resilience. If there are a minority of cases where – in light of the unprecedented fluctuations in market values – gearing turned out to be too high, or the LDI providers did not have sufficient financial resilience, it is important that the regulators and industry address these risks.
Although there has been a great deal of commentary over the last few weeks, members of defined benefit pension schemes should be reassured that their pension benefits are safe; scheme funding is strong and, despite the operational challenges, funding will have been strengthened further by rising yields.
Following statements by the Bank of England, we will further assess with our members whether they believe any additional actions are necessary to achieve orderly markets. However, a key concern of pension funds since the Bank of England’s intervention has been that the period of purchasing should not be ended too soon, for example, many feel it should be extended to the next fiscal event on 31 October and possibly beyond, or if purchasing is ended, that additional measures should be put in place to manage market volatility. With this in mind, we welcome that the Bank of England itself stated last week, that “it intends to unwind its gilt operation in a smooth and orderly fashion” and only “once risks to market functioning are judged by the Bank to have subsided”.
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