UK pension funds turmoil

Pension schemes use liability-driven investments (LDIs) to protect from falling government bond yields. When yields spike, they are hit with margin calls – demands for funds – to cover their losses
                      

Pension funds: Invest their assets in government bonds (gilts*) in order to pay pensions decades later

Hedging: Funds typically hedge through interest rate swaps managed by LDIs. Fund receives fixed rate of interest – in exchange, fund pays variable market rate of interest to counter fall in yield

30-year UK government bonds (yield, percent)
      
Dec 16, 2021: Bank of England (BoE) raises rates to curb inflation, bond yields surge

Margin call: As yields go up, funds need to provide more collateral to LDIs by selling gilts

Sep 23: Prime Minister Liz Truss 5 (above) backs £43 billion (€50bn) of unfunded tax cuts

Sep 28-Oct 14: Fire sale of gilts forces BoE to step in to avert financial collapse

Jan 2005: 4.516

Jun 2007: 4.825

2007-09: Global financial crisis

Fall in yield: Value of swap increases for fund because scheme receives fixed rate, while variable rate it has agreed to pay in return falls

Nov 2021: 0.852

Dec 2021: 1.120

Sep 22, 2022: 3.834

Oct 14: 4.255

4.593
   
    
4
3 
2 
1 
0
 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22   

 
*Government bonds in Britain are known as gilts
    

Sources: Bloomberg, Insight Investment, Reuters 
Picture: Getty Images 
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