Royal Mail pension scheme made emergency cash call amid market turmoil

Royal Mail rushed forward the monthly payment into its pension scheme to help prevent a cash crunch, The Telegraph can reveal, after the mini-Budget sent crucial money markets into a tailspin.

The company responded to a request from the trustees of the Royal Mail Pension Plan to provide emergency liquidity, amid fears across the City that a run on pension funds driven by products known as Liability-Driven Investments (LDIs) would leave major funds insolvent. The Royal Mail scheme has 124,000 members and liabilities of £11bn.

The crisis was driven by a sell-off of government debt triggered by Kwasi Kwarteng’s tax cuts, which surprised markets in its direction and scale.

Royal Mail’s move to make a payment into its scheme early is the latest sign of the degree of concern within major schemes at the run on LDIs and subsequent demands for cash.

LDIs are used by pension funds to shield themselves against moves in inflation and help match their liabilities with their assets. The falling value of gilts after the mini-Budget meant funds faced demands for more collateral and began cashing in their positions in government debt.

It created a vicious cycle that prompted the Bank of England to step into the gilts market with up to £65bn of liquidity.

In a letter to the Treasury select committee, Sir Jon Cunliffe, the Bank of England’s deputy governor for financial stability, said the mini-Budget on 23 September caused a “spiral” of disruption that risked triggering a £50bn fire sale of gilts.

In the most detailed account yet of the Bank’s intervention to prevent a financial crisis, Sir Jon said that without action, pension funds would have been forced to sell £50bn worth of long-term UK government debt “in a short space of time”.

In an extremely volatile market, this risked bond prices falling faster and sending borrowing costs surging, Sir Jon added. He said the potential fire sale was far above the daily average of £12bn.  

By Monday September 26, some pension funds were edging closer to collapse as borrowing costs continued to rise, Sir Jon said, forcing many to dump assets and raise cash at short notice in order to meet cash calls.

Yields on 30-year gilts rose by half a percentage point, leaving them more than 0.8 percentage points higher than at the start of the day on Friday 23 September.

Sir Jon said if this pattern continued, it would have potentially driven a “self-reinforcing spiral, threatening severe disruption of core funding markets and consequent widespread financial instability”.

He described how Bank staff worked overnight to design and implement a backstop to calm markets. The Bank has pledged to buy up to £5bn a day of long-dated gilts from pension funds in order to stabilise long-term borrowing costs.