U.K. Pension Funds Want the Bank of England to Extend its Emergency Bond-Buying Program

By Nick Hedley and Mario Marroquin

Pension funds are urging the Bank of England to extend its
bond-buying program beyond October 14 as the fallout from the U.K.’s latest
budget continues to roil financial markets.

In late September, finance minister Kwasi Kwarteng spooked
investors when he announced substantial unfunded tax cuts at a time when
central banks are seeking to clamp down on inflation.

A substantial sell-off in the long-dated government bond
market caused many defined benefit pension funds to face collateral calls on
their liability-driven investment (LDI) strategies, which are used to manage
risk and ensure the timely payment of pensions.

Much like a glidepath investment strategy, LDI strategies attempt to shield portfolios from market volatility by increasing the share of income-generating assets over time. But LDI strategies often involve contingent claims such as swaps, which can put additional stress on financial markets during periods of rapid repricing.

The Bank of England responded to the surge in yields by launching a bond-buying
program, due to end October 14.

The central bank said in a statement on October 11 that it
would expand the program by also purchasing index-linked bonds. This was
necessary to mitigate the prospect of “self-reinforcing fire sale dynamics,” which
posed a material risk to the country’s financial stability.

The Pensions and Lifetime Savings Association (PLSA) said
this was “a positive additional intervention” but warned that bond purchases
may need to continue for several more weeks.

“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,” the PLSA said in
a statement.

The association said it would work to ensure that the LDI
market, which had generally provided pension schemes with “significant amounts
of stability” in recent decades, remained “resilient and effective.”

Meanwhile, global investor sentiment took another hit on 11 October after Bank of England governor Andrew Bailey said the central bank would end the emergency bond-buying program on 14 October, as planned. 

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