A rise in real yields in the UK last week is thought to have caused several liability-driven investment managers to ask pension scheme clients for additional collateral.
Earlier this month a flight to safety caused Gilt yields to fall significantly, to about 0.4% in the long-end at one point, but more recently in a space of three days yields rose by over 90 basis points to 1.3%, according to pensions firm Spence & Partners.
Long-dated yields have since fallen again, to around 0.8%.
Simon Bentley, director, investment solutions at BMO Global Asset Management, said that after a fairly sustained period of paying capital back to clients, recent interest rate movements will have prompted “quite a few managers” to ask clients for more collateral.
“There’s no obligation for pension scheme trustees to provide that, but if they set a strategic hedge target they’d probably rather keep that in place, so the priority for pension schemes is to know where they’d go to get that additional capital from.
“That probably involves having conversations with other non-LDI managers to understand what the liquidity is like behind the scenes,” he said.
The rise in real yields would have been an opportunity to increase hedge ratios for those pension schemes that haven’t done as much as they’ve liked because rates were so low.
Bentley also said many pension schemes were underweight corporate bonds versus their five to 10-year objectives, and that corporate bonds were cheaper than a month or so ago.
“I’m not calling the bottom of the market, but it’s important to be mindful that this sort of environment creates buying opportunities,” he said.
Jos Vermeulen, head of solution design at Insight Investment, said the manager had calls from clients looking to raise cash, for example because of big falls in sterling and their having hedged their foreign exchange exposure.
“The other thing is that people typically sell equities or use income from other assets to pay their pensions, but I guess they’re a bit less minded to do that given the moves in the equities markets we’ve seen,” he added.
“People are also looking to hoard cash given uncertainty about how this is going to play out.”