Britain’s pensions regulator warns on cash flow risk from market stress

By Carolyn Cohn

LONDON (Reuters) -Britain’s pension scheme trustees should review their cash flow positions and assess if they can cope with further market stresses, the Pensions Regulator said on Tuesday following a sharp rise in gilt yields that may trigger a scramble for cash.

Many pension schemes have large investments in UK government bonds or gilts, which have been hit by concerns over the British government’s planned tax cuts and increased borrowing.

Short-term gilt yields rose 100 basis points over two market sessions, leaving some pension schemes with hedges designed to protect against market volatility under water, industry advisers said.

As a result, pension schemes large and small are facing emergency calls for collateral with as short a notice period as two days on some highly leveraged derivatives positions used to hedge against wild moves in UK government bonds, the advisers said.

Trustees and their advisers should look at the resilience of their investments, risk management and funding arrangements “in more detail”, David Fairs, the regulator’s executive director of regulatory policy, analysis and advice, said in an emailed statement.

He said the pensions regulator expected trustees to “understand the source of those cash flows and how their availability might be affected by the ability to liquidate assets held and by the collateral requirements in a variety of markets, including one under greater stress”.

Pension schemes may need to set aside cash or sell more liquid assets to meet those collateral demands, advisers said.

“Right now it is one of the biggest issues pension funds are dealing with,” said Ben Gold, head of investment at pensions consultants XPS.

There are around 2.5 trillion pounds ($2.70 trillion) in assets in defined benefit, or final salary pension schemes in Britain.

Many of them hedge their UK government bond positions through so-called “liability-driven investment funds”.

The LDI market totals almost 1.6 trillion pounds, according to the Investment Association, though sources said not all pension schemes will be required to put up collateral just now.

Ajeet Manjrekar, Schroder Solutions’ head of UK client solutions, said the firm had not needed to call for more collateral.

“Our pooled solutions have been frequently recapitalised during this period and similarly for our segregated accounts.”

Manjrekar said his preparations were in contrast to other managers “where the additional collateral needs to be provided from external sources and has been requested at very short notice”.

($1 = 0.9258 pounds)

(Reporting by Carolyn CohnEditing by Louise Heavens, Mark Potter, Sinead Cruise and Jane Merriman)