Defined benefit pension funds continued to deleverage in the first quarter of this year, new data from the Office for National Statistics shows. The value of repurchase agreements dropped by £27bn and DB and DC cash holdings also fell markedly. 

 

The changes reveal the impact of the liability-driven investments crisis and higher interest rates on pension scheme investing. 

 

Looking at both DB/hybrid and defined contribution private sector schemes, the ONS said there was a 12% fall in cash holdings over the first quarter of this year, and a 7% fall in property, while gilt holdings increased by 5% and corporate bonds by 4% during the period. Schemes’ equities and pooled funds allocations were down 1% each. 

 

The statisticians noted that some of the reduction in cash might be due to schemes paying off repo liabilities and settling negative swaps, adding that the falls in holdings of other asset classes “may indicate a shift in asset allocation towards bonds for some schemes”, with the £21bn increase in gilt holdings driven by the largest private sector DB and hybrid schemes. 

 

The rise in holdings of physical gilts chimes with the finding that repo contracts – used by DB schemes with leveraged liability-driven investments – fell by £27bn, or 18%, to £123bn during Q1 this year. At the end of September last year, they stood at £200bn before a steep fall after the LDI crisis.  

 

“The reduction in repos may be a response by pension schemes to the events of late September to early October 2022, where a sharp increase in gilt yields prompted short-notice collateral calls on [LDI-related] investments held by schemes,” the ONS said. “A deleveraging private sector [DB or hybrid] pension scheme may intend to lower the asset allocation dedicated towards LDI.” 

 

Higher gilt yields also meant many schemes saw their funding levels improve, which reduces their need for leverage. 

 

In the immediate aftermath of the crisis, regulatory focus started to fall on levels of leverage, and there was even debate about the legality of schemes entering repo contracts, since pension funds are forbidden from borrowing except for short-term liquidity needs. Uncertainty on this point could have added further pressure on trustees to reduce repos and leverage more generally.
   

 

Elsewhere, the ONS also said estimates suggest that there were fewer swaps contracts as at 31 March 2023 than 31 December 2022, with both negative and positive swaps derivative balances falling during this time. The net swaps balance became less negative by £9bn over the first quarter, reaching -£13bn.  
 

Overall, the value of private sector DB assets has reduced considerably. Between 31 December 2021 and 31 March 2023, total assets in private sector DB and hybrid schemes fell by £626bn or 31%, from £2.025tn to £1.399tn, of which £11bn was between 31 December 2022 and 31 March 2023. Assets in public sector DB and in defined contribution schemes remained roughly stable over the same period - albeit at a much lower level - being less exposed to interest rate changes and gilt yields. 

 

How have your scheme’s investments changed since last autumn?