Bank of England offers more support to pension funds amid crisis

LONDON—The Bank of England extended its support to pension funds in the heart of UK bond market crisis although borrowing costs rose higher, a sign that stress in the financial system was not going away.

Bank of Great Britain said on Monday that it would increase the daily amounts it was willing to buy in long-term bonds before the program ended as planned on Friday. It also revealed two types of loan facilities aimed at freeing up money for pension funds after the end of the bond buying.

The measures failed to calm the markets, with yields on 30-year UK gilts, as government bonds are known, jumped to as high as 4.64% from 4.39% on Friday. Outside of the past two weeks, such moves would be considered unusually large for a single day.

Bank of England launched its first foray into the markets on Sept. 28, when it offered to buy up to 5 billion pounds, or about $5.55 billion, a day of long-term government bonds. The program aimed to stem the damage from a furious sell-off in UK government debt over the previous days in the wake of a surprising package of tax breaks announced by the government.

“The underlying message is that there has been too little risk mitigation so far,” said Antoine Bouvet, senior rates strategist at ING. “There is a message to pension funds and potential sellers that the window is closing and they need to hurry.”

The turmoil in the UK bond market created a feedback loop that left investors such as pension funds short of cash and spilled over into other markets. WSJ’s Chelsey Dulaney explains the type of investment at the heart of the crisis. Illustration: Ryan Trefes

He attributed Monday’s bond sales to disappointment among investors who had expected the BOE to extend the bond-buying facility.

The initial intervention in late September initially calmed the markets, and government bond yields fell in response. But dividends have risen again in recent days after it appeared the bank was buying far less than the £5 billion a day, a possible sign the program was not working as intended.

In the history of crisis intervention, central banks often have to make several stabs at solving problems with different types of bond purchases or lending programs before markets are convinced that a viable backstop has been created. During the March 2020 Covid-19 meltdown, the Federal Reserve expanded its lending programs several times before calm was restored.

The BOE said it would increase the daily number of purchases offered until the program ends, starting with 10 billion pounds on Monday, although it was unclear whether distressed sellers would be taken up.

The lending programs announced on Monday included what the BOE called a temporary extended collateral repo facility. This lends money to the pension funds in return for a wider menu of collateral than was previously available to the pension schemes, including index-linked gilts whose returns are tied to inflation, and corporate bonds.

The operations will be processed through banks working on behalf of the pension funds. The BOE also made an existing permanent repo lending facility available to banks acting to assist pension fund clients.

The crisis centers on a corner of the market known as LDIs, or responsibility-driven investments. LDIs became popular in recent years among defined benefit pension schemes in the UK to make enough money in the long term to match what they owed to retirees. These strategies use financial derivatives tied to interest rates.

LDIs also contain leverage, or borrowing, that amplifies pension fund investments by as much as six or seven times. When long-dated UK government bond yields, which underpin LDI investments, rose more than they have ever done in a single day at the end of September, LDI fund managers required pension funds to post huge amounts of new collateral to back up about the investments.

To create this security, pension funds have sold non-LDI bonds, stocks and other investments.

In a letter to lawmakers last week, BOE Deputy Governor Jon Cunliffe said the bank acted to stop forced sales by LDI investors and a “self-reinforcing spiral of price declines.”

The point of the new lending programs and the bond purchase is to make it easier for the pension funds to raise cash so that they can pay down the leverage on their LDI assets without causing major market disruption.

“The Bank of England has listened to schemes and the challenges they are facing right now as they still struggle to access liquidity quickly enough to recapitalize LDI,” said Ben Gold, chief investment officer at

XPS Pensions Group,

a British pension consultant. The measures also help funds avoid having to sell assets at poor prices, he said.

Mr. Gold estimates that it will take between £100 billion and £150 billion for the industry to back its security on LDI funds.

“I would estimate we’re probably about halfway there,” he said. “There is still a lot of activity that needs to be done to get it done by October 14.”

Rising inflation and expectations of increasing issuance of government bonds have pushed up bond yields significantly in recent months. Investors in UK government bonds were jittery of the tax cuts announced by Prime Minister Liz Truss’s government, in part because they were not accompanied by the usual analysis of the impact on borrowing by the independent budget watchdog.

British Chancellor of the Exchequer Kwasi Kwarteng said on Monday he would announce further budgetary measures on October 31 that would be accompanied by forecasts from the Office for Budget Responsibility, which provides independent analysis of government spending. He has previously said that it would not happen until November 23.

Write to Paul Hannon at paul.hannon@wsj.comChelsea Dulaney at Chelsea.Dulaney@wsj.com and Julie Steinberg at julie.steinberg@wsj.com

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