One of the UK pension industry’s biggest asset managers abandoned mark-to-market pricing on funds reeling from the country’s government bond crisis last year, instead choosing higher values that presented a rosier picture of its position.
The highly unusual and previously unreported move by Insight Investment came at the height of the September crisis that began with then-prime minister Liz Truss’s disastrous “mini” Budget.
The typically sleepy liability-driven investment industry, which serves defined benefit pension schemes, was rocked by the sharp fall in UK government bond prices after Truss’s government announced unfunded tax cuts.
A crisis quickly engulfed the £1.4tn sector, which is dominated by the BNY Mellon-owned Insight, BlackRock and Legal & General Investment Management.
Most LDI managers marked down the value of their funds each day in line with plunging gilt prices. Since the funds used leverage, the falling values often triggered immediate demands for cash collateral from their banks.
This dynamic created a vicious cycle in which drops in gilt prices forced LDI managers to sell more gilts to raise cash. But on the day the Bank of England stepped in with a rescue scheme, Insight disregarded market prices and set its own, pushing its funds’ net asset values per share higher, in some cases markedly.
Insight told the Financial Times this month that its LDI funds “operated as normal through the dislocation”. Chief executive Abdallah Nauphal told the House of Commons work and pensions committee last year that Insight was “never forced sellers of gilts . . . largely because we have . . . a more conservative buffer”. He added that the environment at that time had been “tough”.
But Insight’s actions on September 28 illustrate how “tough” it was. By that morning, LDI funds were starting to crack. The BoE later described this as a period when market participants were “shouting on the phone” for help. Insight had just hours left before it reported the value on its funds for September 27 — a typically humdrum daily process that involves scraping data on the previous day’s gilts prices and reporting the numbers each afternoon.
Marking the funds to market at September 27 rates, close to the lowest point in the crisis, would have generated a grim result. Instead, for that one day, Insight took another path. After the BoE announced its targeted bond-buying rescue scheme at 11am on September 28, which instantly pushed gilts prices higher, it gathered its five-person fund board, which comprised three independent members and others from BNY and Insight. They decided to mark the books for September 27 higher by disregarding that day’s gilt moves and marking to market around prices that had prevailed in the middle of September 26.
“Markets were dysfunctional,” Insight told the FT. “In such circumstances, the fund board has discretion to apply a fair value adjustment to market prices. A decision of this nature is made in the best interest of all shareholders in a fund.”
Industry experts say the price adjustment may have shielded Insight from having to sell quantities of gilts large enough to destabilise the already brittle gilts market still further, and also prevented it from making demands for cash of its clients.
BNY Mellon’s chief executive Robin Vince told the FT last month he was proud of how Insight had handled the crisis and pleased with how it has drawn in new clients as a result.
No other LDI manager tweaked its prices, industry experts say, and other gilt market participants say they were still able to find reference gilts prices throughout the crisis.
“We didn’t like the prices, but [using them to mark to market] was the right thing to do,” said one person at another LDI manager. He added that Insight has come out of the crisis “smelling of roses” in part because of its decision not to use that day’s gilt prices.
Simeon Willis, chief investment officer at pensions consultancy XPS Investment, said altering prices was “not common practice” and he did not see it as a “model” for dealing with periods of extreme stress in future.
Publicly available data shows the impact of Insight’s adjustments. In one case — the LDI Solutions Plus Partially Funded Index-Linked Gilts Funds 2061-2070 — the net asset value per share leapt from 45.57p for September 26 to 79.54p the next day.
That was at odds with the falls in gilt prices on September 27, which pushed the yield on the UK’s 40-year inflation-linked government bond up some 0.68 percentage points according to Reuters data. The BoE has described the “speed and scale” of gilt moves around that time as “unprecedented”.
The Central Bank of Ireland, which regulates funds managed by Insight, declined to comment on dealings with individual firms. It has previously advised LDI managers to enhance their resilience.
The UK’s Financial Conduct Authority has said it “expects asset managers to take any necessary or appropriate action to ensure they do not create risks to market integrity or financial stability”.