John Lewis Partnership, London, saw its pension fund swing into deficit from a £474 million ($587 million) surplus for the year ended Jan. 28, as last fall's liquidity crunch hit assets and liability-related hedges.
The deficit was £69 million, as assets dropped 38.8% to £4.4 billion for the year ended Jan. 28. Liabilities also fell, but not enough to offset losses in assets. The pension fund's liabilities totaled £4.5 billion as of Jan. 28, down 33.5% for the year.
The reduction in liabilities was due to interest-rate rises, although that impact was partially offset by higher inflation, an update said Thursday.
The drop in asset values "was largely due to a fall in the value of liability-driven investments designed to hedge interest rate and inflation risks related to the pension scheme's liabilities," the update said.
In September and October, the then-U.K. government announced a set of unfunded tax cuts, which triggered a fall in gilt prices and rise in yields. Pension funds were forced to sell liquid and, in some cases, illiquid assets in order to meet huge collateral calls on their LDI portfolios and hedges.
The John Lewis pension fund sold assets to meet collateral calls in the fall, a spokeswoman said. This resulted in a change in the asset allocation, "with a higher proportion of illiquid assets than before the market volatility occurred." Full details of the changes will be published in the annual report and accounts next month, she added.
Executives at the pension fund also decided to temporarily reduce its 100% hedge to preserve liquidity in its assets.
"In order to preserve suitable liquidity within the trust's assets, the hedge (designed to protect against movements in interest rates and inflation) was reduced from 100% to 75% of assets," the update said. The pension fund trustees are in the process of increasing this to the 100% target, and is set to meet that level in the next few months.
The spokeswoman added that the key takeaway is that the pension fund remains liquid and well-funded despite the market volatility of the fall. She added that the next triennial valuation is nearing conclusion, and it is expected to show a well-funded plan "with a shorter time to self-sufficiency, which is good news for members and the partnership."
In January 2021, the deficit was £647 million.