Bank of England urged to extend emergency action to manage market volatility

A pensions industry body is urging the Bank of England to extend its emergency action to calm the markets and to manage volatility.

After the Bank made fresh moves, widening the scope of its bond-buying programme, the Pensions and Lifetime Savings Association (PLSA) said a “key concern” of pension funds had been that the period of purchasing should not be ended too soon.

The PLSA also said it was encouraging pension funds to take further steps to rebalance portfolios and that it would continue to work with authorities “to understand any lessons learned”.

The Bank has been stepping in after turmoil following the mini-budget left some pension funds close to collapse.

The PLSA represents pension schemes that together provide a retirement income to more than 30 million UK savers.

The body said that members of defined benefit pension (DB) schemes, such as final salary pensions, should be reassured that their pension benefits were safe and scheme funding was strong, despite “operational challenges”.

A statement issued by the PLSA welcomed the Bank of England’s “continued steps to ensure the orderly operation of the gilt market in the wake of record volatility in the price of government bonds”.

The PLSA would assess with its members whether they believed any additional actions were necessary to achieve orderly markets.

It continued: “However, a key concern of pension funds since the Bank of England’s intervention has been that the period of purchasing should not be ended too soon, for example, many feel it should be extended to the next fiscal event on October 31 and possibly beyond, or if purchasing is ended, that additional measures should be put in place to manage market volatility.

“With this in mind, we welcome that the Bank of England itself stated last week that ‘it intends to unwind its gilt operation in a smooth and orderly fashion’ and only ‘once risks to market functioning are judged by the Bank to have subsided’.”

Market turbulence

The PLSA said market turbulence “put significant stress on the gilt market and resulted in rapid and spiralling collateral calls for some defined benefit funds using LDI (liability-driven investment) strategies”.

LDIs use collateral, such as government bonds, known as gilts, to raise cash, but funds can be left exposed to sudden market movements.

The PLSA said: “We continue to encourage all pension funds and service providers to use this period to take further steps to rebalance portfolios and ensure necessary measures are in place to protect their strategies in uncertain times.

“Going forward, we will continue to work with relevant authorities to understand any lessons learned and to ensure the LDI market, which in general has provided UK schemes and UK Plc with significant amounts of stability over the last 20 years, remains resilient and effective.

“LDI is intended as a tool to manage risk and ensure pensions are paid when due with minimum volatility for the funders of the scheme.

“Our analysis suggests that the majority of pension funds used LDI in a prudent manner and with sensible arrangements to meet calls for collateral if normal market conditions, or those under prudent stress scenarios, prevailed.

“Over the last couple of weeks, pension funds also have taken steps to strengthen further their financial resilience.

“If there are a minority of cases where – in light of the unprecedented fluctuations in market values – gearing turned out to be too high, or the LDI providers did not have sufficient financial resilience, it is important that the regulators and industry address these risks.”

Former pensions minister Baroness Ros Altmann said the Bank also needed to completely halt its plan to offload £80 billion of gilts to reduce its huge balance sheet of UK government bonds built up through quantitative easing (QE).

As part of its emergency action launched late last month, the Bank said it would postpone this plan – known as quantitative tightening (QT) – until the end of October, but Baroness Altmann warned this may not be enough.

She said: “With £80 billion of gilt sales overhanging the market, there’s every likelihood the market will plunge again.”

She added: “The Bank must put its QT on hold … not telling markets that it isn’t about to step into the market with £80 billion of sales would invite further chaos.”

Deputy Prime Minister Therese Coffey insisted pensions were safe despite the Bank of England’s warning of a “material risk to UK financial stability”.

She told BBC Breakfast: “I’m absolutely confident pensions are safe, the Bank of England is independent and undertaking its role in trying to bring some stability, which it had done.”