Following the Sept. 23 "mini-budget," U.K. gilt yields soared, prices fell and pension funds with LDI arrangements received multiple, and huge, collateral calls. Pension funds were forced to sell gilts — causing a doom loop in falling asset prices — and other liquid assets, and some also sold illiquid assets at huge discounts. The Bank of England intervened on Sept. 28, pledging to buy billions of pounds of long-dated gilts, stabilizing the situation.
A written submission by the BT Pension Scheme, London, dated November and published this month on the WPC website, said the £47 billion ($56.8 billion) pension fund sold cash, gilts and equities to meet liquidity demands.
The pension fund met all its collateral calls without having to sell inflation-linked gilts "and without recourse" to its corporate sponsor, BT Group.
However, BTPS has "become more cautious in how we manage the scheme's liquidity and (has) increased the collateral buffer to which we operate. This will position the scheme to better 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 declined to comment on the yield assumption now used to calculate its collateral buffer.
BTPS is targeting self-sufficiency by 2034, and warned that "if expected returns fall below this level then the scheme may need more support from BT in future valuations than previously anticipated."
On Wednesday, consultants and LDI managers gave oral evidence to the WPC on the topic of LDI.
Kerrin Rosenberg, CEO of U.K. fiduciary manager Cardano Investment, which uses LDI solutions as part of its OCIO arrangements, warned that there is a "trade-off between how safe one makes the collateral buffer, and what return one can earn on the growth assets. And the more you shore up in collateral, the less you're investing in growth. At 400 basis points, at 4%, there will be some pension funds who will have to go back to the drawing board and will have to reappraise their strategies, and at 4%-type buffer levels they may have to pare back their growth ambitions. And that will have consequences on the amount of money their sponsors will have to put in."