Pension funds hit buffers after rout on the bond markets

Two of the UK’s largest retailers have seen the value of their pension schemes plummet as a result of last autumn’s fall in bond prices.

Sainsbury’s and Marks & Spencer are among thousands of companies whose defined benefit plans – which pay guaranteed pensions based on employees’ salaries – bet on low interest rates.

But they were caught when former Chancellor Kwasi Kwarteng’s mini-budget frightened investors, driving the government’s borrowing costs skyrocketing.

Many pension funds using Liability Driven Investments (LDIs) were forced into an asset sell-off as the crisis exposed previously hidden leverage lurking in their portfolios.

Only a £19 billion intervention from the Bank of England prevented a complete collapse of the pensions market.

The full extent of the damage to pension pots is only now coming to light. The Office for National Statistics estimates that funds have lost £545bn – almost 30 per cent – ​​to the crisis, but experts say this is increasingly looking like an underestimation.

In fact, a third of pension plans have seen their funding position deteriorate as a result of LDIs, a new report finds.

LDIs were designed to improve the financial health of retirement plans because their liabilities would fall faster than asset values ​​if the cost of borrowing rose.

But in a growing number of cases, the opposite happened.

Con Keating of Brighton Rock insurer and a co-author of the report said: “We find some fairly large discrepancies between reported funding ratios and the widespread narrative of very significant improvements in those ratios.”

Baroness Bowles, who sits on the House of Lords committee recently investigating LDIs, said: “I don’t understand why the pensions regulator still thinks everything is bogus.”

The value of Sainsbury’s pension fund fell by £3.4 billion, or 41 per cent – one of the largest falls reported to date, according to the company’s annual report.

The funding position – the difference between assets and liabilities – also worsened, by £1.3 billion.

But it remains in surplus, meaning it has enough money to pay the pensions in full when they are due.

Marks & Spencer fared not much better. The scheme wiped out a third of his assets – £3.3bn – leading to an unfavorable swing in funding of £563m. It also remains in surplus, says the annual report.

The Mail on Sunday has previously reported that the pension plans of rivals Tesco and John Lewis have also been kept low by LDIs.