Sharp increase in gilt yields prompted short-notice collateral calls on LDI investments

A sharp increase in gilt yields in late September to early October 2022 prompted short-notice collateral calls on liability driven investment (LDI) related investments held by pension schemes, according to the Office for National Statistics (ONS)¹. The ONS said the movements in private sector defined benefit and hybrid (DBH) assets, liabilities and derivatives between 30 September and 31 December 2022 suggest schemes deleveraged, likely in response to those gilt yield increases¹.

The Bank of England gilt purchase intervention concluded on 14 October 2022, so the effects of, and responses to, gilt yield rises continued into the fourth quarter of 2022¹. Over that quarter, private sector DBH scheme total assets excluding derivatives fell by £118 billion (8%), continuing falls seen in the previous three quarters¹. Direct holdings decreased by £100 billion to £797 billion¹. Holdings of central government and corporate bonds fell by £29 billion (7%) and £18 billion (15%) respectively, and cash and cash equivalents and receivables fell by £18 billion (19%) and £19 billion (66%)¹.

Partly offsetting the asset falls, total non-pension entitlement liabilities decreased by £59 billion (26%) and the total negative net derivatives balance reduced (became less negative) by £30 billion¹. Repurchase agreement (repo) liabilities, the main borrowing mechanism for pension schemes, fell by £52 billion (26%)¹. The ONS said the decrease in repos is likely because of reduced borrowing, since changes in gilt prices would otherwise have been expected to increase repos over the period¹. Between 30 September and 31 December 2022, the 10-year gilt yield fell from 4.10% to 3.73%¹.

Private sector DBH LDI pooled fund holdings increased by £33 billion (25%) over the quarter, partly reflecting an increase in the value of gilts between those dates¹. The ONS said the estimates may suggest a divergence in LDI strategy response between segregated (single pension scheme) LDI and LDI pooled funds¹.

Across the whole of 2022, the market value of private sector DBH schemes fell by £591 billion (32%), while the market value of public sector DBH and private sector defined contribution (DC) schemes combined fell by £50 billion (7%)¹. The ONS attributed the larger percentage fall for private sector DBH schemes mostly to greater exposure to gilts, as global bond yields rose with interest rate rises by central banks¹. Between 30 September and 31 December 2022, the UK FTSE all-share index increased by 8% and the US S&P 500 index by 7%¹.

The bulletin also published illiquid asset holdings for the first time, showing that private sector DC schemes hold a smaller proportion of illiquid assets than DBH schemes, with the allocation lowest for private sector DC schemes and highest for public sector DBH schemes¹. Funded public sector schemes such as the Local Government Pension Scheme are included in the figures, but unfunded schemes such as those for civil servants, teachers and NHS staff are not¹. The response rate for the fourth quarter of 2022 survey was 82% at the period of closedown¹.

Why it matters for households

The figures describe what happened to the investments behind workplace pensions in the final quarter of 2022, not what members received. The collateral calls and subsequent deleveraging affected the schemes that hold these investments, and the ONS estimates cover funded occupational schemes rather than individual pots. Members of private sector DBH schemes, and of funded public sector schemes such as the LGPS, are within the population the survey describes; members of unfunded public sector schemes are not¹. The ONS notes that its market value estimates do not consider pension entitlement liabilities, which are required for estimates of schemes' total funding level, so the figures do not by themselves show whether any scheme was in surplus or deficit¹.

What happens next

The ONS said all estimates up to and including the fourth quarter of 2021 will not be subject to further revisions¹. The next release was scheduled for 21 September 2023¹.