'Fire sale' fears overstated despite rates challenge

Fiduciary manager says many schemes have seen improvement in funding position

Jonathan Stapleton
clock • 3 min read
David Rae: Liquidity remains more than sufficient to meet the collateral requirements of liability hedges

David Rae: Liquidity remains more than sufficient to meet the collateral requirements of liability hedges

Fears over fire sales of quality assets have been largely overstated despite significant rises in yields over the past week, key industry figures say.

The fiduciary manager said that, while the theory of rising rates triggering capital calls and the possibility of liquidity problems was valid, the reality had been overstated and there had been "no crisis management required".

Russell Investments head of strategic client solutions David Rae said: "I think the reality of fire sales of quality assets is largely overstated."

He added: "Our experience over recent days with UK corporate defined benefit clients is that there is no crisis management required and liquidity remains more than sufficient to meet the collateral requirements of liability hedges."

Rae explained the reality today for many schemes is that recent rate rises have translated into an improved funding position and a smaller balance sheet.

He said: "Given the fixed nature of deficit recovery contributions, for many schemes the smaller balance sheet means the returns required from assets in the future will actually be lower. Said another way, the fixed deficit recovery contributions will go a lot further in improving the pension scheme's funding level than before the recent market events."

Rae added: "For most schemes with sound governance structures, further de-risking at the moment is orderly and part of the plan. It's a far cry from the headline-generating fire sales."

Despite this, Rae said the Bank of England's intervention would not mark the end of the volatility in gilt markets.

He said: "While this is indeed a pause to recent yield rises, they still remain significantly higher than a week ago or a year ago and this leaves us in a fundamentally different place. This is being felt through the real economy and the financial markets alike and will continue to do so for some time."

Rae also warned that even a moderation from the Truss government may not help - saying the "genie is now out of the bottle".

He concluded: "The end result? A pause but sadly, not the end of heightened gilt market volatility."


Bayes Business School professor of asset management Andrew Clare also believed the worries had been overstated.

He said: "There has been a great deal of hyperbole with regard to pension fund finances recently.

"It is true that pension fund trustees and their investment advisors have been very busy recently, but certainly not because their schemes are about to go bust or need a bail out.

Clare added: "For those schemes that are fully hedged against interest rate movements, recent events would have left their funding position largely unchanged. For schemes that are partially hedged, the rise in interest rates would almost certainly have led to an improvement in their funding positions."

Despite this, he said some schemes would have had to sell gilts to realise the necessary cash for capital calls.

He said: "As interest rates rise, schemes need to honour their side of the swaps trade by passing over cash to their swap counterparties. Most schemes would be well prepared for this event, with pools of cash and gilts ready for such an event. But this means that some schemes would have had to sell gilts to realise the required cash, and this is one of the main reasons why gilt yields rose so sharply. Some schemes would also have had to sell other liquid asset classes, such as high-quality corporate bonds."

Clare concluded: "Once the dust settles, I expect most schemes to be in either the same funding position that they were prior to the mini-budget or even in a better one than before."

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