Shortage of liquidity creates difficult situations for pension managers

The Central Bank of Sweden, Riksbank, has published a staff memo entitled The liquidity crisis in UK pension funds from a Swedish perspective. The memo contains an analysis of the recent turmoil in the UK gilt market caused by a government announcement to drastically reduce taxes and increase debt levels to spur economic recovery and the impact of such upon UK guilt yields and UK pension funds. The memo further points out the differences between the UK pension fund market and the Swedish pension fund market which primarily entails different investments and investment strategies (Swedish funds invest about half of their assets in equity securities while British funds invest nearly all of their funds in government bonds) and looks at subsequent liquidity risks faced by pension funds in either of the two countries, if market conditions were to change – as occurred in September 2022.
The memo concludes by noting that – despite the fact that Swedish pension funds are more resilient to liquidity risk simply due to the fact that they diversify their investments to a high degree and thus are less leveraged to protect against changing interest rates – they still are vulnerable for liquidity risk on their remaining (leveraged) fixed-income positions. This particularly holds true considering the fact that the current exemption from the central clearing requirement for interest-rate derivatives will expire in 2023, leading pension fund managers to centrally clear their derivative positions and thus being subject to mark-to-market and the exchange of cash variation margins.
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To find out more about the issue, please refer to the enclosed analysis.