UK pension funds have lost £425bn due to the bond market crisis in the past year

According to a recent regulatory analysis, the value of UK pension funds will plummet by approximately £425bn by 2022 due to bond market turmoil caused by Liz Truss’s “mini” Budget. This led to retirement schemes being forced to sell assets.

This week, the Pensions Regulator released a long awaited Report that revealed the extent of the losses suffered by pension funds in the year 2022. These losses equated to an asset value drop of almost a quarter.

The House of Commons Work and Pensions Select Committee had asked the regulator examine the impact of September 2022’s bond market crisis on thousands of schemes that use popular liability-driven investments (LDI) strategies.

The regulator said that the fall in gilts’ value had a significant impact on pension schemes using ‘Liability Driven Investment’ (LDI) strategies. This was especially true for those who had leveraged their investments in long-term gilts.

LDI strategies can be used by defined benefit schemes to manage their liabilities. The strategies involve large purchases of government securities, but also leverage or borrowing in the form of instruments like gilt repurchase agreement.

Pension schemes were forced to sell hundreds of billions of dollars in assets in order to meet collateral demands when long-term gilt rates shot up in response to then Prime Minister’s economic program. The selling of bonds only ceased when the Bank of England intervened.

The regulator estimated the value of assets in 5,100 defined benefit company plans would fall by approximately £425bn between 2022 and 2025, from £1.79tn down to £1.36tn – a drop of 24 percent.

In its report published on Wednesday, the regulator stated that “this fall in assets was primarily caused by the loss of value in gilts and corporate bonds as well as property.”

The report showed that the asset values reached their lowest point in 2022 during September of that same year. This was due to the “mini” Budget that was published at that time.

The analysis found that pension schemes would end 2022 with a better overall financial position, due to the fact that their liabilities fell more than the asset value drop, and higher gilt yields reduced costs of pension promises.

The aggregate liability value fell by around £575bn , or 33 percent, compared to the asset value drop of 24 percent.

The regulator stated that the “true effect” of the gilt crisis “will not fully be known for several years”, after each scheme has done a formal evaluation of their finances.

Iain Clacher of Leeds University Business School, who testified before the Work and Pensions Committee, said that the report “shows how significant the impact of the LDI Crisis was”.

This suggests that the number will likely be higher when all is known.