UK pension schemes are racing to raise hundreds of billions of pounds to shore up derivatives positions before the Bank of England calls time on support aimed at keeping them afloat, according to Reuters.
The Bank of England plans to stop buying bonds on Friday, leaving pension schemes scrambling to meet a collective cash call estimated to be at least £320 billion.
On Tuesday, the central bank made its fifth attempt in just over two weeks to try and restore order in markets, after a surge in yields on September 28 threatened to overwhelm pension schemes that have loaded up on leveraged derivatives.
Pension funds have spent the past two weeks trying to raise cash by selling off UK government bonds, or gilts, index-linked and corporate bonds but the fundraising task is intensifying, sources told Reuters.
Compounding the pain, providers of so-called liability-driven investment strategies (LDI) are demanding more cash to support new and older hedging positions.
The cash buffers now required are about three times larger than previously requested, according to four consultants advising pension schemes, as market players seek bigger cushions against greater swings in bond prices, Reuters said.
"This week with the gilt market not fully calmed, lots (of schemes) are now looking at this and saying we actually need to do a bit more and so there is renewed action to get even more collateral across," Steve Hodder, a partner at pension consultants Lane Clark & Peacock told the newswire.
While estimates of how much pension funds need to sell vary they are in the hundreds of billions of pounds, and it is not known how much funds have already raised in cash. Some schemes will also be cutting their overall LDI exposure if they cannot meet the collateral demands, consultants say.