Pension funds are selling billions of pounds worth of assets to rebuild their cash buffers before the Bank of England removes critical market support next week that it introduced to prevent the collapse of the UK’s government bond market.
Individual pension funds are each selling tens or hundreds of millions of pounds of liquid assets to boost their reserves, according to pension consultants with knowledge of the transactions, who asked not to be identified discussing their clients. Asset sales across the industry have climbed into the tens of billions of pounds, according to Nikesh Patel, head of client solutions at Van Lanschot Kempen, a wealth management firm.
There are around 5,500 so-called defined benefit schemes in the UK, according to The Pensions Regulator, managing £1.8 trillion. Although not all of them have become forced sellers, scores of them are selling, according to the consultants.
“We are at the center of the storm now,” said Calum Mackenzie, investment partner at Aon, who said he is aware of significant sales of liquid assets in the market. “The storm is moving and it will sweep up other parts of the market.”
The Bank of England pledged £65 billion ($73 billion) of emergency intervention on Sept. 28 after 48-hours of turmoil in the gilt market that caught out pension funds. UK pension fund managers deploying so-called liability-driven investment strategies got trapped in a vicious cycle: they had to put up additional collateral because government bond prices were plunging, and to raise cash they sold bonds, which sent prices down further, forcing them to put up more collateral.
Longer-term gilt yields are already starting to creep higher as the Oct. 14 end date for its bond-buying looms into view, partly as policy makers make it clear they are in no mood to simply prop up prices for traders.
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