Sterling money market funds have gathered £53bn in just a fortnight as UK pension schemes rush to build defences against market volatility before the Bank of England’s emergency bond-buying programme ends on Friday.
The UK pensions industry has been in a dash for cash to avoid a fresh liquidity crisis if there is a repeat of the chaotic moves in the gilt market caused by chancellor Kwasi Kwarteng’s package of unfunded tax cuts in his September 23 “mini” Budget.
The powerful inflows into money market funds, which act in a similar way to a bank account for institutional investors, are one of the clearest signs yet of how schemes are selling assets in order to build a war chest that they hope will be big enough to weather any new collateral calls.
The pension schemes need quick access to cash since many use liability-driven investment (LDI) strategies to match their assets and liabilities — vehicles that required large injections of collateral after Kwarteng’s fiscal statement sent gilts tumbling. At the end of last year, LDI schemes covered about £1.4tn in defined-benefit pension fund liabilities, according to The Pensions Regulator.
Larry Fink, chief executive of BlackRock, a major player in the LDI industry, said on Thursday that it appeared “much of the reconstruction of these products may have been done and the market may be . . . a little more normalised”.
Emma Hudson, investment consultant at Isio, added on Friday that “there are early positive signs from the market this morning, but given the volatility experienced in the last few weeks, pension schemes are holding their breath”.
The inflows into sterling money market funds “have been gigantic”, said Peter Crane, president of Crane Data, a specialist service focused on the money market sector. “The growth for sterling money market funds has been far stronger than for the dollar and euro-denominated funds that trade in Europe, which indicates that specific UK issues are driving the increase.”
Sterling money market fund assets registered £251bn on October 11, a 27 per cent rise from September 28, the day the BoE launched its intervention to avert “fire sales” by pension funds.
Holdings of the most liquid assets in sterling money market funds have also risen this month, according to Fitch, the rating agency.
“This suggests the managers of these funds are anticipating large withdrawals related to LDI collateral calls to pension schemes or to build liquidity cushions in light of the extreme gilt market volatility,” said Minyue Wang, an analyst at Fitch.
The majority of the inflows have gone to sterling funds run by BlackRock, Legal & General Investment Management and Insight Investment, the asset managers that oversee the biggest LDI portfolios.
Pension managers’ efforts to shore up their positions come ahead of the “cliff edge” on Friday afternoon, when the central bank’s bond-buying programme ends. Gilt prices have rallied strongly over the past two days on expectations that Liz Truss’s government will unwind at least some of its £43bn in unfunded tax cuts before announcing its debt-cutting plan on October 31 — helping to ease the pressure on the pensions sector.
“Whilst the current fall in yields is helpful to increase the resilience pensions funds have going into next week, with so much uncertainty still present, it could be a while before the markets are considered ‘calm’ again,” said Hudson.
Schemes had also encountered multiple “pinch points and blockages” that had slowed their efforts to raise cash, said Nikesh Patel, head of client solutions at Van Lanschot Kempen, a Dutch private bank and LDI investor.
“There have been enormous strains on the resources of asset managers, consultants, banks and scheme trustees. The financial sector is simply not geared to dealing with simultaneous urgent requests from thousands of pension schemes,” added Patel.
Hudson said the practical challenges confronting schemes were significant.
“Many investment funds have dealing windows that might be open once a week or once a month. So schemes might only have one chance (in that time window) to deal.”
The tight deadline has forced some schemes to ask for help from their corporate sponsor with short-term loans. “We are also seeing companies with more than one pension scheme in their group requesting inter-scheme loans,” said Jacqui Reid, a partner with law firm Sackers.
“Loans from corporate sponsors are an absolute last resort,” said a portfolio manager who asked not to be named.