The pension scheme trustees at the government contractor Serco have been forced to tap the company for £60m of emergency support after the UK’s financial markets meltdown this week.
Serco’s £1bn pensions scheme is the latest to scramble to raise cash after a plunge in the pound and a meltdown in UK bond prices triggered calls on fund managers to provide collateral for niche financial products they had taken out to hedge against swings in the value of their investments.
Those products – known as liability-driven investments, or LDIs – have been widely adopted and used by mostly final-salary pension funds managing more than £1.5tn in savings.
However, the recent drop in sterling and in the value of UK government bonds, which was sparked by fears about the government’s ability to fund its tax-cutting mini-budget, has caused problems for pension funds, by reducing the value of their investments. To offset the mismatch between assets and liabilities, investment banks have this week been requesting more collateral from pension funds, which have to dump assets to raise that cash at short notice.
The request from Serco’s pension scheme, which was first reported by Sky News, was made earlier this week. However, it is understood that the fund – which last reported a half-year surplus of £105.3m – was not at risk of a funding shortfall for pensions payouts.
Serco declined to comment.
Similar cash calls on UK pension funds up and down the country eventually forced the Bank of England to act, intervening with a £65bn emergency bond-buying package on Wednesday.
One investment bank estimated this week that UK pension funds might have been be forced to stump up as much as £550bn worth of collateral if the Bank had not stepped in to prop-up plunging government bond prices.
While the package has calmed markets, reports on Friday suggestedthat a number of pension funds were also selling stocks and corporate bonds to try to cover collateral calls on their LDI products, raising concerns that the value of those assets may fall too.