UK gilt selloff triggers pension cash calls in first big test since 2022 crisis
10/01/2025 15:12
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Yield on 30-year UK government bonds hit 26-year high on
Friday
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Some UK pension funds told to come up with more cash for
hedging
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UK pensions market faces first big test since 2022
'mini-budget'
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BlackRock note says market moves to hit collateral
resilience
By Carolyn Cohn and Iain Withers
LONDON, Jan 10 (Reuters) - Some British pension funds
are being told by asset managers to come up with more cash to
support their hedging positions after a recent jump in borrowing
costs, but pensions advisers told Reuters this week the market
was behaving in an orderly way.
XPS and Gallagher said some funds had been instructed to
post more cash to maintain derivatives positions they hold
through so-called Liability Driven Investment (LDI) strategies.
BlackRock BLK.N , a major LDI provider, said in a note to
clients on Friday that although higher borrowing costs will have
reduced pension schemes' collateral resilience, funds were
better prepared than previously to withstand volatility.
The market moves are the first big test of the pensions
market since an industry overhaul of LDI usage to reduce risk
and meet regulatory demands for more collateral and lower
leverage. The derivatives will require more collateral against
them to make up for the movement in price.
LDI, which helps funds meet future payouts by hedging
against moves in bond yields, was at the centre of a crisis in
September 2022, when plans by the government of then-prime
minister Liz Truss for unfunded tax cuts sent yields surging.
Pension advisory firms XPS and Gallagher, along with six
other industry players, said the market had responded to this
week's sharp selloff in debt markets in an orderly manner.
The Bank of England and The Pensions Regulator declined to
comment on Friday.
The yield on 30-year British government bonds, known as
gilts, hit a fresh 26-year high on Friday as higher inflation
expectations and worries about Donald Trump's imminent arrival
in the White House prompted investors to sell.
Ten-year gilt yields are up by 25 basis points, their
biggest weekly jump in a year but far less than the nearly 70
bps weekly jump seen in 2022.
BlackRock, a big player in LDI services alongside Legal &
General LGEN.L and Insight Investment, said in its note
explaining the selloff that pension schemes were starting from a
different place to previous years.
It was nevertheless "vital" they continued monitoring their
collateral, the firm added.
The spikes in yields following the Truss government's
"mini-Budget" in 2022 triggered collateral calls on funds'
hedging positions, forcing operators to fire-sell assets to
raise cash.
"If yields did spike materially, then you could see things
being stress-tested again. But we're certain the industry is in
a much better place," said Carl Hitchman, chief investment
officer at Gallagher Benefit Services UK.
One client had received a cash call with a deadline of next
week, but the fund had liquidity to meet this, he said.
XPS said it has seen some capital calls, but CIO Simeon
Willis said this was the market operating normally.
The gradual rise in British borrowing costs this time had
made it manageable, advisers said, with Insight Investment,
Legal & General and Schroders SDR.L all saying the LDI market
was proving resilient and orderly.
"Pension funds are well prepared and managing the volatility
effectively," a spokesperson for BT BT.L pension fund manager
Brightwell said.
(Reporting by Carolyn Cohn and Iain Withers; Additional
reporting by Amanda Cooper; Editing by Tommy Reggiori Wilkes and
Alexander Smith)
((Iain.Withers@thomsonreuters.com;))