Margin calls for more collateral are still coming through, though at a less aggressive pace than two weeks ago, according to market participants, who asked not to be identified. Funds are still selling assets to meet them, managers are trying to lobby the BOE, everyone is bracing for next week when the central bank support has gone, they said. 

Many funds are making tough choices in the run up to the deadline. Almost daily they have been having to decide whether to dump assets to raise cash for possible future margin calls, which would weigh on returns; reduce their LDI positions, which would leave them more exposed if rates turn back around; or find other ways to get some cash.

Some have asked the corporates, whose employees pensions they manage, for emergency short-term loans so they don’t have to sell prized assets. Others have agreed that the companies could accelerate already-agreed payments they would have made to their pension schemes over several years, according to consultants, who asked not to be identified discussing their clients. This means some companies have been stumping up large one-off payments to their pensions, the people said.

“For instance, if they had a pre-agreed payment plan to put in cash on a monthly schedule, some have decided to make an advanced contribution equivalent to one year’s deficit recovery payment,” Norbert Fullerton, a partner at Lane Clark and Peacock said.

“Across the industry there are schemes that can’t raise enough cash and have had to reduce their leverage and hedge ratios,” he said. “It’s an unfortunate situation to be in but some don’t have sufficient liquid assets to sell.”

Eoin Treacy's view

Every pension fund has been faced with the same challenge. They need an assumed return of 7-8%. When bond yields collapsed and stayed down for a decade, the scope for compounding disappeared. Quantitative easing was often described as favouring traders at the expense of savers and the dilemma faced by pensions is a vivid example of that.

The only choice they had was to move further out the risk curve. The LDI industry was designed to sidestep regulation by allowing pensions to take on leverage with the obvious risk you can lose more than your initial investment. The alternative investments sector offered higher yields but at the expense of liquidity. 

The success of the Yale endowment in pioneering alternative investments is particularly notable. The primary reason they did so well for so long is because they had first mover advantage. Today, public pensions in the USA, covering 29 million people have 47% of their assets in equity and 27% in alternatives. To say it is a crowded trade is a gross understatement.

Asset prices are exceptionally high. Whether that is residential or commercial property, art, secondhand watches, cars, luxury goods, timber, farmland, speculative businesses etc. The higher interest rates go, the greater the pressure on the assumed values of these assets and businesses. The issue with UK pensions is currently a liquidity crisis. If illiquid asset prices succumb to market forces, we could be looking at solvency crises.

When police, sanitation worker, firemen, teacher etc., pensions go bust, taxes go up and hiring stops. Ultimately, the quality of the services provided falls and leads to lower standards of living for everyone. That’s the risk in overtightening and let’s hope the Fed is alert to it.

This article suggests mark to market has not even started. Here is a section:

“The fact private equity doesn’t mark-to-market covers up the problems,” said David Elms, head of diversified alternatives for Janus Henderson Investors. “Markets are continually down. It will have to flow through to valuations.”

Harvard University’s endowment also offered words of caution, even as private assets helped it curb losses during the most recent academic year. Investors in this area have done well but it “may indicate that private managers have not yet marked their portfolios to reflect general market conditions,” said N.P. “Narv” Narvekar, Harvard Management Co.’s chief executive officer.