Reply to: Pension funds getting margin called....

[DealorNoDeal]

After over a decade of near-zero interest rates, it's not surprising that a sudden dramatic step change would undermine some "creative" financial wizardry. Anything involving derivatives always makes me a little uneasy.

I wonder what else is vulnerable?

[AtW]

"Bank confirms pension funds almost collapsed amid market meltdown

Official explains how promise to buy up to £65bn of government debt staved off destructive UK financial spiral

Pension funds managing vast sums on behalf of retired people across Britain came close to collapse amid an “unprecedented” meltdown in UK government bond markets after Kwasi Kwarteng’s mini-budget, the Bank of England has said.

Explaining its emergency intervention to calm turmoil in financial markets last week, the central bank said pension funds with more than £1tn invested in them came under severe strain with a “large number” in danger of going bust."

https://www.theguardian.com/business...arket-meltdown

[AtW]

“Soaring bond yields in the wake of Kwasi Kwarteng’s mini-budget led to large cash calls on pension funds in relation to LDIs, which are derivatives meant to help insulate pension funds from the impact of inflation. The falling value of bonds led to funds being asked to put up more capital to backstop their investment positions.

L&G is one of the biggest providers of LDIs in the UK, alongside BlackRock and Columbia Threadneedle. At its capital markets day in 2018, L&G’s investment management arm (LGIM) revealed that it had a 42pc share of the LDI market in Britain.

The Jefferies analysts said L&G earns 0.2pc in fees on its LDI products and around £387bn of its assets under management relate to LDI funds, meaning it earns around £77m a year in revenue from these products.

Over the past two decades, pension funds have been encouraged by the Pensions Regulator to adopt LDI strategies to help match their liabilities with their assets.

However, the analysts also said the crisis over the last week could damage L&G’s reputation and trigger outflows from its funds.

They said: “The biggest risk for L&G is that this crisis has discredited the firm's risk management abilities. In the process, it's possible that this sparks outflows from LDI funds, as clients reallocate to alternative strategies, with lower liquidity risks.””

[AtW]

“L&G made £80m a year selling pension products that forced the Bank of England into £65bn bailout

The Bank intervened after plunging markets forced pension funds to dump assets”

https://www.telegraph.co.uk/business...-bank-england/

Not a problem for regulators having this tulip poison the system

[NotAllThere]

Seriously fella. Stop trying to infect every thread with your obsession of me. I'm sure everyone else is finding it tedious

Oh yes.

[AtW]

Source: https://www.ft.com/content/52a6d03c-...4-004c3885e7f1

[Whorty]

Millions of warty's with Typewriters?

Seriously fella. Stop trying to infect every thread with your obsession of me. I'm sure everyone else is finding it tedious

[AtW]

It gets better….


”The sharp moves in gilt yields sparked demands from some asset managers for clients to stump up extra cash to cover shortfalls in their derivatives positions. Some pension funds were forced to sell gilts to raise cash, exacerbating the market mayhem. BlackRock, which sits between the pension schemes and banks on such derivatives trades, told its clients that it would no longer demand additional collateral. BlackRock is “not proceeding with any further recapitalization events until further notice”, said the email to LDI clients, which was seen by the Financial Times and was sent at about 11am, before the Bank of England announced its emergency intervention to stabilise the gilt market. Fogarty said: “If you run out of collateral they were saying, ‘we will close the position’, without going back to ask for more money from the fund. It is protecting their positions against contagion but it is not protecting their pension funds.” He added that other LDI managers put in place similar restrictions. A pensions expert said: “BlackRock would have been on the hook for a default in its LDI funds if it had not taken these steps and that is obviously a reputational hit that it wanted to avoid.”

https://www.ft.com/content/0f32fdf3-...0-d087860cfe6c

Noice… so it was even worse than just margin calls - excellent market oversight…

[vetran]

Woo hoo ... that's a first

Millions of warty's with Typewriters?

[Whorty]

you may be right

Woo hoo ... that's a first

[AtW]

The funds were holding gilts. Gilts are/were 'safe'.
The banks did the margin call on the funds as the arse fell out of the gilts market.
Or that's what I gathered from some research googling last night.

The issue is that pension funds engaged in marginal trades (otherwise there would have been no margin calls).

This should have never been allowed in the first place (to anybody, but at the very least not to regulated pension funds).

[Lance]

I was talking about the tax credits on the investment returns/divs held by the pension schemes, including the DC ..... I thoughts this tax raid hit the DC pensions too? Happy to be proved wrong though.

you may be right

[Whorty]

it was only defined benefits he strip mined. And they are either paying out as expected, or gone bankrupt (like BHS, but Phili Green had more to do with crashing that than Brown). Defined contributions were safe from that pillaging.

At the time they DB funds were rolling in cash, that they would never need (cos the amount they pay out is known). So they were stripped of excess cash. Then came the 2007/8 crisis, Brextulip, Covid and now #Trusster****

Plenty did complain at the time. But they were people in the know.

I was talking about the tax credits on the investment returns/divs held by the pension schemes, including the DC ..... I thoughts this tax raid hit the DC pensions too? Happy to be proved wrong though.

[Lance]

No they weren't holding gilts they entered trades to buy/sell gilts at a future date at a given price i.e. derivatives. If the price moves too far they might not hold enough cash to cover the losses when the trades become due.

ahh. ok/.

[BlasterBates]

The funds were holding gilts. Gilts are/were 'safe'.
The banks did the margin call on the funds as the arse fell out of the gilts market.
Or that's what I gathered from some research googling last night.

IANAFC

No they weren't holding gilts they entered trades to buy/sell gilts at a future date at a given price i.e. derivatives. If the price moves too far they might not hold enough cash to cover the losses when the trades become due.