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The Royal Mail scrambled to make the monthly payment to the pension scheme to help prevent a cash crunch, The Telegraph could reveal, after the mini-budget plunged important money markets.
The company has responded to a request from Royal Mail Pension Plan trustees to provide emergency liquidity, amid concerns across the city that a rush to product-driven pension funds known as liability-driven investments (LDIs) will leave major funds insolvent. The Royal Mail scheme has 124,000 members and a liability of £11 billion.
The crisis was driven by the selling of government debt sparked by the Kwasi Quarting tax cuts, which surprised markets in its direction and scale.
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Royal Mail’s move to make a push into its scheme early is the latest sign of the degree of anxiety within the master charts when running on LDIs and subsequent claims for cash.
Pension funds use LDIs to protect themselves from inflationary movements and to help match their liabilities with their assets. The depreciation of gold bonds after the mini-budget meant that the money faced demands for more collateral and began disbursing its funds into their positions in government debt.
It created a vicious cycle that pushed the Bank of England into the gold bond market with up to £65 billion of liquidity.
In a letter to the Treasury Select Committee, Sir John Cunliffe, the BoE’s deputy governor for financial stability, said the September 23 mini-budget had caused a “vortex” of turmoil that risked causing a £50 billion gold sale.
In the most detailed account yet of the bank’s intervention to prevent a financial crisis, Sir John said that without action, pension funds would have had to sell £50bn of long-term British government debt “in a short period of time”.
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Sir John added that in a highly volatile market, the prices of risky bonds fall faster which leads to higher borrowing costs. He said the potential sale was well above the daily average of £12 billion.
By Monday 26 September, some pension funds were close to collapse as borrowing costs continued to rise, Sir John said, forcing many to dump assets and raise cash at short notice in order to meet cash calls.
Yields on 30-year credit bonds rose by half a percentage point, making them more than 0.8 percentage points higher than they were at the start of the day on Friday, September 23rd.
If this pattern continues, Sir John said, it will likely lead to a “self-reinforcing vortex, threatening to severely disrupt core finance markets and consequent widespread financial instability”.
He described how the bank’s staff worked overnight to design and implement a prop to calm the markets. The bank has pledged to buy up to £5 billion per day of long-term bonds from pension funds in order to stabilize long-term borrowing costs.
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