European pension funds ought to have entry to a central bank-backed facility as a final resort to assist them keep away from the fire-sale of property compelled on UK pension managers, the derivatives trade’s fundamental commerce physique has stated.
The International Swaps and Derivatives Association (Isda) on Wednesday known as for a system that might enable pension funds to extra simply convert their extra collateral into money with a purpose to meet margin calls from clearing homes.
It comes as officers in Europe assess the implications of the UK’s pensions and bond market chaos final month, when Westminster’s “mini” finances prompted a monetary disaster. The sharp and surprising surge in gilt yields following the announcement of unfunded tax cuts triggered margin calls on derivatives for pension funds, which they met by promoting property right into a falling market.
The sudden plunge in gilt costs and fast gross sales threatened to spiral uncontrolled, forcing the Bank of England to step in with a £65bn bond-buying programme with a purpose to stabilise markets.
The paper outlined a sequence of suggestions to make clearing of derivatives in Europe extra enticing. The overwhelming majority of the world’s rate of interest swaps are managed in London, at LCH.
Pension funds have shied away from clearing as a result of they fearful that they might not have a prepared provide of cash or different extremely liquid property crucial to satisfy margin calls.
A report from the European Commission estimated European insurance coverage corporations and pension funds needed to pay an additional €50bn in margin over a 12 day interval in March 2020 when markets have been panicked by the impression of coronavirus.
Isda urged policymakers to “conduct an in-depth analysis of how central bank access could be intermediated to allow [pension funds] to convert high-quality liquid assets into cash, potentially limiting this to a last-resort tool that is only used in stressed market conditions,” it stated.
Other Isda suggestions included selling voluntary clearing by public corporations, increasing settlement hours for euro transactions past 6pm, and provides European clearing homes higher entry to central financial institution cash. Isda stated its paper had been written earlier than the “mini” Budget.
Isda’ name was echoed on Tuesday by Dutch pension fund APG, which has round €558bn property underneath administration.
Pension funds “remain dependent on the willingness of banks to accept bonds as collateral,” Jan Mark van Mill, head of treasury and buying and selling at APG, wrote on a company weblog. “We would therefore like to see the ECB guarantee the reliability of repo markets, just like the US Fed[eral Reserve] and the Bank of Canada do.”
Banks and buyers use repo markets to quickly change illiquid property for highly-liquid collateral like money. Those property are deposited in clearing homes.
The name comes because the Dutch central financial institution requested native retirement funds to examine for indicators of stress, recommending that they evaluation liquidity guidelines and report on any want for fireplace gross sales of property, within the wake of the issues within the UK market.
The Netherlands, the EU’s largest pensions market, has some similarities with the UK. Many Dutch pensions additionally use derivatives contracts open for a few years to assist them match their property with their liabilities and defend in opposition to modifications in rates of interest.
Both European and British pension funds are at the moment exempt from clearing their trades by means of a clearing home however that exemption expires in June subsequent 12 months.
HOLLAND
Rising interest rates boost pension funds despite market losses Business
October 20, 2022
The five biggest Dutch pension funds are in better shape, as rising interest rates offset financial market losses, and that means pension increases could be on the cards again next year.
The government is putting up the state pension by 10% in 2023, and all the big five are on target to be able to at least partially put up company pensions in line with inflation.
Civil service pension fund APB, one of the biggest funds in the world, has had a average coverage ratio of 116% over the past 12 months, and that is well above the 105% lowest level for index linking.
The coverage ratio shows if a fund has enough assets to meet its pension obligations. Healthcare pension fund Zorg en Welzijn, construction sector fund BfpBouw and the two engineering funds PME and PMT also beat the 105% limit.
However, the Financieele Dagblad points out that all five funds have made considerable losses on their investments this year – even bigger than during the financial crisis earlier this century.
‘In fact it is very odd,’ actuary Marc Heemskerk told the paper. ‘Pension funds are losing billions but we are all cheering because the coverage ratios are going up.’ The funds will decide next month whether or not to put up pensions in 2023.
Read more at DutchNews.nl
Reuters
Toby Sterling
Oct 19, 2022
AMSTERDAM — The Dutch central bank (DNB) said on Wednesday it had called on pension funds in the Netherlands to review their readiness to weather a sudden spike in interest rates, following turmoil among British funds.
A spokesperson for the bank confirmed a Financial Times report that said the funds had been asked to review their holdings of liquid assets.
In Britain, the central bank was forced to intervene after a surge in yields on Sept. 28 threatened to overwhelm pension schemes that had loaded up on leveraged derivatives.
Dutch pension funds, which collectively hold around 1.5 trillion euros in assets, have seen their solvency improve dramatically over the past year as interest rates have risen – reducing the value of their investments, but decreasing the value of their obligations by a far larger amount.
Dutch pension funds make less use of interest rate hedges than their British peers and benefit from the larger and more liquid eurozone government bond market.
However, some analysts say they still could be vulnerable in the event of a sharp sell-off in government bonds.
The DNB noted in its annual review of financial stability in the Netherlands, published on Oct. 10, that Dutch funds had smoothly sold 88 billion euros of investments in the first half of 2022.
“When a rise in interest rates happens gradually, there is no liquidity risk” it said, though it noted that a liquidity crisis was still possible.
Jan Mark van Mill, head of Treasury and Trading at fund manager APG, says his organization conducts monthly liquidity stress tests.
However, “what happened in the UK is a new scenario, so we (now) adjust the stress tests accordingly,” he said in a Q&A published on APG’s website on Monday.
He argued the European Central Bank (ECB) should ensure that Europe’s banks continue to offer pension funds cash in exchange for government bonds during a liquidity crisis, guaranteeing the so-called “repo market.”
The largest Dutch fund ABP, with 491 billion euros in assets, said it was “monitoring developments.”
“What happened in the UK is unprecedented,” said spokesperson Asha Khoenkhoen in an emailed response to questions.
ABP’s solvency ratio stands at 126%, up from 110% at the end of 2021 and 93.5% in 2020. It began indexing payments to pensioners to compensate for inflation in July for the first time in more than a decade.
“We have a prudent financial policy and we take into account extreme stress scenarios,” Khoenkhoen said.
UK Pensions Must Learn Lessons From Cash Crunch, Regulator Says
, Bloomberg News
(Bloomberg) --
UK pension programs should review their funding, liquidity and hedging policies in the wake of widespread collateral calls at the heart of the turmoil in the gilt market, according to their watchdog.
The Pensions Regulator (TPR) said it will continue to monitor the situation beyond Friday, when the Bank of England is scheduled to stop its emergency bond-buying operations. The interventions were designed to prevent a vicious cycle of selling prompted by collateral calls on some pension funds.
“Insuring schemes against all extreme market outcomes might not be a reasonable expectation but it is important that lessons are learned from these recent events,” it said in a statement.
Defined-benefit programs usually benefit from rising yields as it deflates the value of their liabilities. However, the scale and speed of the recent spike in yields proved too much for some funds to handle. The yield on 30-year UK government bonds has more than doubled since August. On Sept. 26, it surged by the most on record in data going back to 1996.
While these schemes were not at risk of collapse, the “key challenge has been the ability to access liquidity at short notice to maintain their liability hedging positions,” the regulator added.
To allow for “swifter trading”, the regulator recommended that schemes consider taking steps such as granting LDI managers the power of attorney over some scheme assets or adding one or more professional trustees.
Other considerations the regulator proposed included:
- Discussing the potential for employers to provide additional collateral when the scheme is unable to generate enough liquidity from its assets, with one option being accelerating future contributions or via a loan
- Getting advice on whether to maintain a reduced level of hedging if a higher level requires the disposal of less liquid assets with a “significant haircut”, for schemes that are running a hedged position against interest-rate and inflation risks
- Reviewing the balance of risks in portfolio in light of market conditions and consider a rebalancing
©2022 Bloomberg L.P.
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