Gilts crisis sends shares in pension firms diving

SHARES in British pension giants have crashed, after the bond market crisis triggered by Kwasi Kwarteng’s minibudget provoked huge cash calls on the retirement savings businesses.

Legal & General (L&G), Aviva and Phoenix Group were among the biggest fallers on the FTSE 100 yesterday, as the Bank of England staged a shock intervention in the bond market over fears of a pensions crisis.

L&G, Aviva and Phoenix fell 8.9pc, 8.5pc and 6.8pc respectively, before recovering some losses following the Bank’s announcement. Asset manager M&G was the second biggest faller on the blue-chip index, as much as 8pc.

Many pension schemes have large investments in UK government bonds, which have slumped since the Government last week announced plans to increase borrowing to fund tax cuts.

While falling prices increase the yield pension funds earn on gilts, hedging strategies mean the drop has triggered “margin calls” where funds are asked to

put up more capital to backstop their investment positions. The problem centres around so-called liability driven investment (LDI) strategies, which pension schemes use to shield themselves against moves in inflation and help match liabilities with assets.

The size of the LDI market has exploded over the past decade and Threadneedle Street was warned by investment banks and fund managers in recent days that the cash calls could trigger a crisis in the pensions market.

The fall in bond prices has forced pension funds to raise cash by selling gilts to meet margin calls. That risked a vicious cycle whereby the value of gilts keeps declining and forces more selling.

Officials were warned of the risk of a crash that could result in mass insolvencies of pension funds.

Since the mini-budget, shares in L&G have slumped 15pc, while Aviva and Phoenix have fallen 11.7pc and 12.4pc. The Pensions Regulator yesterday said it was monitoring financial markets to assess the impact of price movements on the funding of defined benefit, or final salary, pension schemes.

A spokesman said: “We welcome steps announced by the Bank of England to restore orderly conditions through temporary purchases of longdated UK government bonds.”

On Tuesday, the regulator told pension scheme trustees to review their cash flow positions and assess if they can cope with further market stresses.