The Pensions Regulator has welcomed the Bank of England's intervention in bond markets and said it is monitoring the effect on pension scheme funding.
Following the 'mini budget' from new chancellor Kwasi Kwarteng on Friday, gilt yields had risen sharply, with 30-year yields touching 5.10% on Wednesday morning, which threatened financial stability by forcing pension funds to sell assets to meet cash collateral requirements for those that have hedged their risk.
Amid warnings of an imminent crisis in UK pensions, the Bank was forced to step in.
The pensions watchdog said: “We are monitoring the situation in the financial markets closely to assess the impact on DB [defined benefit] pension scheme funding.”
“We welcome steps announced by the Bank of England to restore orderly conditions through temporary purchases of long-dated UK government bonds.”
“We again call on trustees of DB schemes and their advisers to continue to review the resilience and liquidity of their investments, risk management and funding arrangements, and plan accordingly to protect the interest of scheme members.”
Ian Mills, partner at Barnett Waddingham said the intervention caused an immediate sharp drop in gilt yields, although they are still significantly higher than the levels in the middle of last week.
“For DB pension schemes this has mostly been good news – these schemes value their liabilities by reference to gilt yields and, for most, rising yields means an improving funding position.
“Importantly, most DB pension schemes’ funding positions will now be stronger than they were a week ago."
However, Mills said many schemes have been hedging this risk, protecting themselves against the risk of falling yields and increasing their liabilities.
“Whilst this strategy has been very successful over recent years as UK yields have hit low after low, the operational risks of the strategy have, for some, crystallised in recent days," he said.
“As yields rise the hedges need to be collateralised with cash, and some schemes have started to run low of cash and other liquid assets.
“The vast majority of schemes have been able to rebalance their asset portfolios quickly enough to raise the cash needed, but some schemes haven’t.
“These schemes have been forced to unwind their hedges, and in some cases at the worst possible moment.
“After the Bank of England’s announcement this morning yields fell back sharply – schemes that were forced to unwind hedges this week may well have effectively locked-in losses to their funding positions."
He noted that the vast majority of DB schemes have successfully navigated this period of heightened volatility and have generally come out the other side in a better funded position.
Shares in financial companies were under pressure, not least because of the implications of the Bank having to step in to avoid "a material risk to UK financial stability" and worries about pension funds.
M&G PLC (LSE:MNG) fell 6.5%, Legal & General Group PLC 6%, Aviva PLC and Phoenix Group Holdings PLC (LSE:PHNX) 5%.