Market events and implications for RPF

5 October 2022


Reuters Pension Fund (“RPF”) employs a strategy known as Liability Driven Investments (“LDI”) to ensure that changes in our liabilities are broadly matched by changes in our assets (a concept known as “hedging”). The strategy uses a combination of investments in UK government bonds (“Gilts”) and derivative contracts which provide exposure to Gilts to ensure that the desired level of hedging is achieved.

When the market value of Gilts falls, the Fund must post collateral equal to this fall to the contract’s counterparty. Conversely, when the market value of Gilts rises, the counterparty must post collateral equal to this rise to the Fund. This approach ensures that our assets move in lockstep with our liabilities, whilst releasing capital to invest in return-generating assets to improve our funding level.

Market Events

Following the “mini budget” on 23 September, Gilt prices fell sharply as markets reacted negatively to the additional borrowing needed to finance the new Conservative government’s growth-oriented policies. The scale and speed of the fall in Gilt prices reportedly resulted in some institutions who adopt similar LDI strategies struggling to meet collateral calls, resulting in forced sales of other assets and some hedging positions needing to be liquidated. This placed further downward pressure on Gilt prices and prompted the Bank of England (“BoE”) to intervene on 28th September to stabilise the market. The BoE announced a time limited programme to purchase up to £65bn of long-dated Gilts. As of 30th September, this had sparked a significant recovery in Gilt prices and eased the situation for these institutions.

Implications for RPF

The significant rise in gilt yields in recent months has caused the value of our LDI portfolio (“hedging assets”) to fall. However, this has been offset by a similar fall in the value of our liabilities. The Fund therefore remains well funded on a prudent measure of our liabilities and retains ample liquidity to meet pension payments.

We hold conservative levels of collateral in our LDI portfolio to ensure that our LDI manager is able to meet collateral calls in a stressed market environment. In addition, we have a structure which allows the manager to rebalance from other liquid assets in our portfolio to bring the collateral pool back to target levels. Our investment advisor has been in regular contact with our LDI manager to ensure that this process is operating as intended. They have confirmed that all collateral calls have been met and that our hedges have remained in place throughout the recent market volatility. The Trustees and our investment advisor are continuing to monitor the situation closely and will take further action as appropriate.

Source: Reuters Pension Fund
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