UK pension schemes are racing to raise billions of pounds to shore up derivatives positions before the end of the Bank of England's (BoE) deadline, as per a report from Reuters. The Bank of England plans to stop purchasing bonds on October 14.

This will leave pension schemes scrambling to meet at least 320 billion pounds ($355 billion) without a buyer of last resort.

The central bank on Tuesday made its fifth attempt in just over two weeks to try and restore order in markets after a surge in yields on September 28. Pension funds, without much success, have spent the past two weeks trying to raise cash by selling off UK government bonds, gilts and corporate bonds.

Meanwhile, a Financial Times report cited sources as saying BoE has signalled privately to bankers that it could extend gilt purchase programs if needed. But after the report, the Bank of England reiterated the bond-buying scheme still will end this Friday.

Moreover, the providers of so-called liability-driven investment strategies (LDI) demand more cash to support new and older hedging positions.

"This week, with the gilt market not fully calmed, lots (of schemes) are now looking at this and saying we actually need to do a bit more, and so there is renewed action to get even more collateral across," said Steve Hodder, a partner at pension consultants Lane Clark & Peacock.

While estimates of how much pension funds need to sell vary, they are in the hundreds of billions of pounds, and it is unknown how much funds have already been raised in cash. Some schemes will also cut their overall LDI exposure if they cannot meet the collateral demands, consultants say.

The Pensions and Lifetime Savings Association on Tuesday called for the BoE to consider continuing its emergency bond-buying programme to October 31. The central bank's Governor Andrew Bailey later said in the US, "My message to the funds involved and all the firms involved managing those funds. You've got three days left now. You've got to get this done."

LDI helps schemes match their liabilities with assets. Pension funds were previously putting up cash to withstand a move in government bond yields of 100 to 150 basis points which have been wiped out.

-With inputs from Reuters

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First Published:Oct 12, 2022 12:34 PM IST