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Bank of England Announces Extra Steps to Help Pension Funds

Published 2022-10-10, 03:12 a/m
© Reuters.

By Geoffrey Smith

Investing.com -- The Bank of England announced extra measures on Monday to support pension funds hit by the sharp falls in U.K. government prices in recent weeks.

The Bank, which had set up a 65 billion-pound ($72 billion) liquidity facility to keep the Gilt market functioning at the end of September, said it will increase the daily limit for the auctions at which it has bought Gilts for the last two weeks.

The Bank has been sparing in its purchases so far, buying only 5 billion out of a possible maximum 40 billion pounds of Gilts. The purchases increase the U.K. money supply, making it harder for the Bank to bring down inflation which is currently running at nearly 10%.

In addition, the Bank said it will effectively replace the current emergency system with a new facility that will lend liquidity to the market, rather than simply creating it with outright Gilt purchases.

The so-called Temporary Expanded Collateral Repo Facility (TECRF) will widen the range of collateral that banks can use to access central bank funds.

The new facility will add to the options currently available for institutions needing liquidity. The Bank also offers regular Indexed Long Term Repo operations each Tuesday and its new permanent Short Term Repo facility, launched last week, which offers an unlimited amount of reserves at the Bank Rate each Thursday.

Banks' demand for liquidity has risen sharply because many pension funds have needed to provide big increases in collateral against the derivatives that they hold as part of so-called 'liability-driven investment" strategies.

LDI - which became popular as a seemingly low-risk way to juice returns for pension funds in an era of ultra-low interest rates - has shot to prominence since the 'mini-budget' of Chancellor of the Exchequer Kwasi Kwarteng triggered a slump in the pound and in Gilts, leaving LDI-linked hedges badly out of the money.

The Bank said in its statement that "Beyond the end of this week’s operations, the Bank will continue to work with the U.K. authorities and regulators to ensure that the LDI industry operates on a more resilient basis in future."

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