UK watchdogs hold crisis talks to avert gilts cliff-edge

The UK watchdogs responsible for the £1.5tn corner of the pensions sector that came close to imploding this week are holding daily talks with asset managers to stave off a fresh crisis when the Bank of England’s emergency bond buying ends.

The £65bn plan, which ends on October 14, was launched on Wednesday to safeguard the pensions sector after this week’s market turmoil sparked by chancellor Kwasi Kwarteng’s plans for unfunded tax cuts.

Regulators have called emergency meetings under their Authorities’ Response Framework, which is triggered by threats to financial stability, people familiar with the matter said.

They are concerned that when the BoE withdraws its support a bond sell-off will resume, causing yields to rise and putting more pressure on defined-benefit pension funds, which dumped gilts as they sought emergency collateral.

Defined-benefit pension schemes are still having to sell other assets to raise cash to meet margin calls, despite the BoE’s intervention. In the rush to raise cash, pension schemes have dumped stocks and bonds, with some seeking bailouts from their corporate backers.

Daniela Russell, head of UK rates strategy at HSBC, said the BoE bond purchases were a “sticking plaster” which buys time for pension schemes. “With a possible cliff-edge when this is due to end . . . the bank may consider offering more support,” she said.

“The BoE has bought time to mitigate the shock,” said Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International.

“But unless something changes on the fiscal policy side the BoE will have to stay in the market longer. The market needs to see how they are going to get a decline in debt to GDP over the medium term. Either the policies from the budget have to go or they are going to need massive spending cuts.”

One option might be for the BoE to formalise its gilt-buying operation into a permanent facility that could be triggered in similar circumstances, without the need for emergency intervention or the backstop of taxpayer funds, a former policymaker said.

The events of the past week have rocked pension schemes and also the UK housing market, with many lenders withdrawing deals, and homeowners uncertain about whether their mortgages will be affordable.

The sharp fall in the price of 30-year government bonds, triggered by last week’s tax cut announcement, led to unprecedented margin calls — demands that they stump up more cash — for defined-benefit schemes.

The Financial Conduct Authority, the Pensions Regulator and the Treasury declined to comment. The BoE said in a statement that the “scale and speed” of the ructions in the bond market this week far exceeded historical moves”.

The 30-year gilt yield swung 1.27 percentage points on Wednesday, greater than the annual range in all but four of the past 27 years, it added.

Additional reporting by Adrienne Klasa, Daniel Thomas and Sylvia Pfeifer