Pension funds hit buffers after rout on the bond markets

Two of Britain’s biggest retailers have seen the value of their pension plans plunge as the fall-out from last autumn’s bond market rout spreads.

Sainsbury’s and Marks & Spencer are among thousands of companies whose defined benefit schemes –which pay guaranteed pensions based on workers’ salaries – placed bets on interest rates staying low.

But they were caught out when former Chancellor Kwasi Kwarteng’s mini-Budget spooked investors, causing government borrowing costs to rocket.

Many pension funds using so-called liability driven investments (LDIs) were forced into a fire-sale of assets when the crisis revealed previously hidden leverage lurking in their portfolios.

Only a £19 billion Bank of England intervention prevented a complete collapse of the pensions market.

Hit: Sainsbury’s and Marks & Spencer are among thousands of companies whose defined benefit schemes placed bets on interest rates staying low

The full scale of the damage inflicted on pension pots is only now emerging. The Office for National Statistics reckons funds lost £545 billion – almost 30 per cent – in the meltdown, but experts say that increasingly looks like an underestimate. 

A third of pensions schemes have seen their funding position actually worsen as a result of LDIs, a new report shows.

LDIs were meant to improve the financial health of pension schemes because their liabilities would fall faster than the value of assets if the cost of borrowing increased.

But in a growing number of cases the opposite happened.

Con Keating of insurer Brighton Rock and a co-author of the report said: ‘We are finding some fairly large discrepancies between reported funding ratios and the widely broadcast narrative of highly significant improvements of those ratios.’ 

Baroness Bowles, who sits on the House of Lords committee that recently investigated LDIs said: I can’t understand why the pensions regulator still thinks everything is hunky-dory.’

The value of Sainsbury’s pension fund fell by £3.4 billion, or 41 percent – one of the largest drops reported so far, according to the company’s annual report.

Its funding position – the difference between assets and liabilities – also worsened, by £1.3 billion.

But it remains in surplus, meaning it has enough money to pay pensions in full when they are due.

Marks & Spencer didn’t fare much better. Its scheme saw a third of its assets – £3.3 billion – wiped out, leading to an adverse £563 million swing in funding. It also remains in surplus, the annual report says.

The Mail on Sunday has previously reported that the pension plans of rivals Tesco and John Lewis were also laid low by LDIs.

This post first appeared on Dailymail.co.uk