Fears of a wave of pension fund insolvencies last week were an “overreaction”, the global pensions chief of PwC said today, after concerns spread amid the fallout of the government’s so-called mini budget last week.
Rising gilt yields caused by government plans to ramp up borrowing and slash taxes left some pension funds facing hefty collateral calls and sparked worries of a mass liquidity crisis in UK pension funds.
But Raj Mody, global head of pension at PwC, looked to pour cold water on the fears today and said the extent of the crisis had been overblown.
“While there were undoubtedly some scary and challenging moments in some institutions, some of the narrative which has come out could have been unnecessarily scary for others, he told City A.M.
“Pension fund members should not need to worry about their pensions being paid because of any technical intricacies of LDI contracts.”
The Bank of England last week stepped in to start a bond-buying programme of up to £65bn to steady gilt yields. The volatility had heaped pressure on funds deploying so-called liability driven investment strategies who were being asked to stump up cash in collateral calls.
The crisis has forced some funds to sell off assets on the cheap, but Mody said today it may have also been an opportunity for funds to de-risk their portfolios.
“While you might not like it from a behavioural psychology point of view, selling those assets may not have actually been a bad strategic outcome, because it’s an opportunity to lock in a better overall funding status,” he said. “That might be the right thing to do.”
Some funds were likely to have sold off a lot of their equity holdings in the past week to raise cash, he added.
The crisis has drawn attention to LDI strategies deployed by pension funds and ignited calls for an inquiry from political figures.
Chairman of the work and pensions committee Sir Stephen Timms is set to call for an explanation from regulators this week over how the strategies were allowed to proliferate among pension funds.
Regulators have reportedly been holding daily talks with asset managers in a bid to dodge a fresh crisis when the Bank’s bond buying programme stops on the 14th October.
Fund managers have also begun slashing their leverage in the past days as they look to shore up their position in the wake of the crisis.
The world’s biggest asset manager BlackRock said on Friday it was cutting leverage in its LDI funds to shield its clients from volatility.
“We have been reducing leverage in some of our LDI funds, acting prudently to preserve our clients’ capital in extraordinary market conditions. Trading in BlackRock funds has not been halted, nor has BlackRock ceased trading in gilts,” a spokesperson said.