BT’s pension fund lost an estimated £11 billion (US $12.43 billion) in the build up to the U.K. bond market meltdown last month, which it attributed mainly to the performance of its liability hedging investments.
“Following the year-end, there was a significant fall in the value of the scheme’s assets, during a period of significant market volatility in the second half of September,” the BT Pension Scheme said in its annual report for the fiscal year ended June 30. “Prior to the Bank of England’s gilt market intervention, there was an estimated £11 billion fall in the value of the scheme’s assets.”
Nearly every defined benefit plan in the U.K. hedges interest rate and inflation risk using a combination of British bonds – known as gilts – and interest rate and inflation swaps, which are financial instruments the BT pension fund uses to protect against changes in interest rates.
“During this time, our hedges have performed as expected, and whilst the value of the scheme’s assets has fallen over this period, there has been no worsening in our estimated funding position,” Morten Nilsson, chief executive officer of BT Pension Scheme Management, wrote in the report.
The proportion of the change in liability value hedged is known as the “hedge ratio,” which is intended to reduce volatility in the pension plan’s funding position and increases benefit security. The report said that to mitigate the effect of changes in interest rates and inflation expectations, the pension fund’s interest rate and inflation hedge ratios have been increased to approximately 95% and 90%, respectively, over the last few years.
This means that approximately 95% of any change to the plan’s technical provisions due to changes in interest rates, and approximately 90% of any technical provision change due to inflation expectations is expected to be offset by the change in value of the cashflow-aware portfolio, which includes investment-grade credit, secure income, and government bonds and cash.
“We have continued to work closely with the BTPS trustee board to refresh our inflation stress tests and scenario analysis,” Nilsson said.
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Tags: Bank of England, Bond Market, BT, BT Pension Scheme, BT Pension Scheme Management, gilt, Inflation, Morten Nilsson, Pension Plan, UK