Leading firms caught up in the pensions storm: BP, Rolls-Royce and Royal Mail

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Top firms caught up in pension storm: BP, Rolls-Royce and Royal Mail use funding strategy blamed for bond market collapse
The schemes have LDIs designed to protect against interest rate/inflation spikes
The recent sell-off in government bonds, known as gilts, sparked widespread use
The full reliance on LDI for schematics is just now starting to show


Some of Britain’s biggest corporate pension schemes have poured billions into the same complex financial products that prompted the Bank of England bailout, it has emerged.

An investigation by The Mail on Sunday found that schemes run by oil giant BP, aerospace manufacturer Rolls-Royce and Royal Mail have huge liability-oriented investments (LDIs) that are designed to protect against interest rate spikes and inflation. .

The widespread use of LDI by pension funds of companies operating on final salary schemes has sparked a recent sell-off in government bonds known as gilts.

Volatile: BP, Rolls-Royce and Royal Mail have huge liability-based investments designed to protect against interest rate spikes and inflation

Bank chief Andrew Bailey was forced to step in with a £65bn bailout package.

The full dependence of major companies on LDI is only now beginning to emerge.

BP filings show that almost £30 billion is invested under the pension fund’s LDI strategy.

The energy conglomerate’s scheme pays pensions based on the last earnings of its 60,000 members. Its assets are £47bn, making it one of the biggest in the country.

The scheme is in surplus, meaning it currently has more assets than it needs to cover current and future payments to members. Experts say it has been carefully managed since it was closed to new members more than a decade ago.

Other giant schemes that rely on LDI include the Rolls-Royce Defined Benefit Scheme, which has around 38,000 members. It includes an LDI portfolio of almost £9bn.

Royal Mail, which has 125,000 members, has built an LDI portfolio worth £8bn. The British Airways pension scheme also has some limited options.

The use of LDI has increased dramatically in recent years as companies have closed their final salary schemes to new entrants and moved some of their pension liabilities off their balance sheets. LDI funds invest heavily in supposedly “safe” hogs, but they also use leverage to boost returns. This benefits pension funds when interest rates are low and stable, but reverses when they rise suddenly.

This follows former Chancellor Kwasi Kwarteng’s mini-budget three weeks ago. This caused investors to scramble to sell more gilts to meet more margin calls from other investors, leading to a potential “doom loop”. The bank’s intervention, which ended on Friday after it bought nearly 20 billion pounds, has so far prevented the infection from spreading.

Pension fund Legal & General has already become one of the largest LDI providers in the UK, along with BlackRock and Insight Investments.

Former Bank of England governor Mervyn King said this weekend that the funds had been “caught”. He warned there would be “a big debate about why pension funds were allowed to borrow” under such complex arrangements.

There is no suggestion that any of the funds mentioned above are at risk. But experts say some of Britain’s 5,200 final salary schemes may need to sell assets such as shares to deal with the fallout. The corporate schemes named here today clearly show the use of LDI in their company documents. But The Mail on Sunday was told that many other companies have significant investments in LDI – including some that were contacted this week but declined to confirm or provide details.

Foundations are not required to publicly disclose the extent of their relationships with LDI. This could become an increasing problem in the coming weeks, especially if problems arise in smaller or more vulnerable funds.

Iain Clacher, Professor of Pensions and Finance at the University of Leeds Business School, said: “One of the main issues here is that the size of the LDI impact is not very visible. There is also great variation in LDI exposure, and this is also not visible.

“This lack of disclosure and oversight of the market is a serious failing and it goes back to the Pensions Regulator.”

A Rolls-Royce spokesman said last night: “The Rolls-Royce UK Pension Fund is one of the few in the FTSE 100 that has a significant surplus. Our defined benefit pension scheme is not affected by the current market volatility.

“The fact that the scheme is unaffected is testament to the long-term approach that has been taken to pension risk management over many years.”

BP declined to comment beyond the information already provided.

Royal Mail said its pension scheme used LDI funds but it was “not affected like other UK schemes”. It added: “The Royal Mail Pension Scheme regularly buys and sells assets. It is not a forced seller of any assets. Security needs were met.”