BoE intervention saved pension schemes from needing employer cash-regulator

LONDON, Oct 12 (Reuters) - Employers could have been called on to bail out pension schemes had the Bank of England not intervened to support the UK bond market, the pensions regulator said on Wednesday, underscoring the turmoil caused by the new UK government's economic plans.

The head of the Pensions Regulator said that, without the central bank's action, some pension schemes would have either been forced out of their derivative positions at a loss or would have had to ask their sponsor employers for help.

"This, in turn, could have had an impact on the scheme sponsor," Charles Counsell said in a letter to parliament's work and pensions committee.

Some pension schemes were in danger of running out of cash to pay for collateral following a surge in UK government bond yields late last month, when markets were spooked by the new government's plan for billions of pounds of unfunded tax cuts.

The surge led to demands on pension schemes to stump up more collateral on liability-driven investments (LDI) - typically derivatives used to hedge government bonds.

The Bank of England (BoE) stepped in to buy government bonds, but its programme is due to end on Friday, pressuring pension schemes to sell billions in pounds of assets to meet their collateral calls before that support is withdrawn.

Defined benefit - or final salary - pensions schemes were not at risk of collapse because of the dramatic rise in bond yields, Counsell said in the letter to Stephen Timms, the chair of the committee, dated Oct. 10 and published on Wednesday.

But some schemes may have lost money after the surge in yields forced them out of their LDI positions.

Some pension funds would have been knocked out of LDI positions before the BoE intervened on Sept. 28, and then unable to restore them until after yields had dropped sharply following the intervention.

"The exact outcomes for pension schemes is mixed. We understand that many pension schemes were able to continue with their LDI programmes but some may have been adversely affected by selling LDI at a low price and subsequently replacing it at a higher price," Counsell said.

Pension consultants and industry sources have previously told Reuters schemes have been seeking credit lines from their sponsor employers to help ease a liquidity crunch. read more

Oversight of the 1.6 trillion pound ($1.77 trillion) LDI market has come under scrutiny following the market turmoil.

"It is unclear whether the use of LDI will change as a result of the significant changes in funding levels as a result of bond yields and the associated asset allocation decisions that trustees may make as a result of that," Counsell said in the letter.

"We will be giving further consideration to this, alongside other regulators."

UK pension fund trustees should step up engagement with investment managers to quantify funding gaps and risks prior to the end of the BoE's bond-buying scheme, the regulator said earlier on Wednesday in guidance for trustees.

($1 = 0.9047 pounds)

Reporting by Carolyn Cohn and Tommy Reggiori Wilkes; Editing by Emelia Sithole-Matarise and Mark Potter

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