Volatile borrowing costs stir memories of UK's pensions crisis — but insiders say this time, it’s a 'nice opportunity'
A sharp spike in U.K. borrowing costs this year triggered memories of the 2022 "mini-budget" crisis, which rocked the country's pension funds and led to emergency market intervention by the Bank of England.
But this year, U.K. pension providers have not only weathered recent volatility in government bonds, they have benefited from them, and even increased the so-called liability-driven investments (LDIs) that wreaked such havoc previously.
Yields on U.K. bonds, known as gilts, jumped to their highest levels in decades earlier this month before cooling nearly as fast. However, they remain elevated. On Wednesday, gilt yields ticked lower after U.K. Finance Minister Rachel Reeves gave a widely anticipated speech promising to go "further and faster" to boost Britain's sluggish economy. Yields across the board were 3 basis points lower at 11:50 a.m. London time.
In Sept. 2022, a massive sell-off in U.K. debt drove down the value of assets held by pension funds, a major investor in gilts, and led to margin calls on their LDI funds. These largely leveraged investments are often used by pension funds as a hedge against factors such as inflation and interest rate movements. The knock-on effect from the margin calls threatened to push several defined benefit pension funds into insolvency.
The sell-off was prompted by a major package of unfunded tax cuts announced by then-Prime Minister Liz Truss. The proposals, described as a "mini-budget," were announced at a time when U.K. inflation was sky-high, interest rates were rising and the economy was stagnant. Market turbulence spurred the Bank of England to intervene with an emergency purchase of long-dated bonds, the debt LDI funds were particularly sensitive to. The central bank later