On the go: The National Grid stepped in to loan £325mn to two of its defined benefit pension schemes during the recent crisis in the gilt markets at the end of October, according to its latest half-year results.
Short-term loans were issued to the schemes on October 19 2022 and will be repayable no later than January 16 2023.
National Grid said these short-term loans allow the schemes “additional time to liquidate assets in an efficient manner in order to restore their significant liquidity buffers”.
National Grid took the move after “the significant fall in pension scheme asset and liability values for our schemes largely driven by a significant rise in UK and US Government bond yields”, following the September "mini" Budget.
As well as impacting IAS 19 valuations, National Grid UK pension schemes were “required to source cash at short notice to cover collateral calls on their liability driven investment (LDI) portfolios”.
These short-term liquidity pressures “did not materially impact the security of pension benefits”, it added, however the loans were part of a strategic action by National Grid “to mitigate any risks associated with further increases in UK Government bond yields”.
Sainsbury’s revealed on November 3 it had also put in place loans to protect its DB pension funds, totalling £500mn.
The facility was put in place on October 18 for three months, to further enhance the Sainsbury’s Pension Scheme's “resilience in the event of unexpected substantial further rises in interest rates”, the retail company stated in its 2022 interim results.
In both cases the loans were needed to provide additional liquidity support to the defined benefit pension schemes following large moves in UK government bond yields in the wake of the fiscal statement.
Following shock tax cuts in then-Chancellor Kwasi Kwarteng’s fiscal plan, gilt prices collapsed, prompting collateral calls for schemes from managers. Issues arose specifically around pension funds’ LDI strategies, designed to protect against falling interest rates.
Schemes sold gilts and other assets in a scramble for liquidity. The Bank of England announced an emergency £65bn bond-buying programme on October 10 to avoid a 'doom loop' that would crash the market.
