(Bloomberg) -- Pension funds are selling billions of pounds worth of assets to rebuild their cash buffers before the Bank of England removes critical market support next week that it introduced to prevent the collapse of the UK’s government bond market.

Individual pension funds are each selling tens or hundreds of millions of pounds of liquid assets to boost their reserves, according to pension consultants with knowledge of the transactions, who asked not to be identified discussing their clients. Asset sales across the industry have climbed into the tens of billions of pounds, according to Nikesh Patel, head of client solutions at Van Lanschot Kempen, a wealth management firm.

There are around 5,500 so-called defined benefit schemes in the UK, according to The Pensions Regulator, managing £1.8 trillion. Although not all of them have become forced sellers, scores of them are selling, according to the consultants.

“We are at the center of the storm now,” said Calum Mackenzie, investment partner at Aon, who said he is aware of significant sales of liquid assets in the market. “The storm is moving and it will sweep up other parts of the market.” 

The Bank of England pledged £65 billion ($73 billion) of emergency intervention on Sept. 28 after 48-hours of turmoil in the gilt market that caught out pension funds. UK pension fund managers deploying so-called liability-driven investment strategies got trapped in a vicious cycle: they had to put up additional collateral because government bond prices were plunging, and to raise cash they sold bonds, which sent prices down further, forcing them to put up more collateral.

Longer-term gilt yields are already starting to creep higher as the Oct. 14 end date for its bond-buying looms into view, partly as policy makers make it clear they are in no mood to simply prop up prices for traders.

LDI is a strategy popular with defined benefit pension plans, which guarantee retirees a fixed payout regardless of swings in financial markets. Many pension funds use derivatives to help keep their assets and liabilities balanced. Typically, the funds hold derivatives that gain value when interest rates go down and lose value when they rise. Under the terms of the derivatives contracts, when the value falls, the funds can face margin calls—demands to put up more collateral.

The selloff has continued as the funds ready for the withdrawal of the BOE support. The central bank pledged to buy as much as £65 billion of long-dated gilts over 13 days to Oct. 14.

Pension funds were actively offloading their most liquid assets until Tuesday this week when selling abated, according to a senior banker, who manages bond sales for the UK government and for British and European companies. Much of the selling centered around European corporate bonds, US credit and US Treasuries, he said, asking not to be identified because the transactions are private. 

There has also been selling of collateralized-loan obligations, or CLOs, an investment that has been historically popular with pension funds, according to Aza Teeuwen, partner at TwentyFour Asset Management.  Last week, more than 1.5 billion euros ($1.5 billion) of CLOs were listed for sale, with more sold this week, he said in a note on Wednesday.

“Sales in the last week-and-a-half could total more than the previous three months combined,” he wrote.

Industry participants, including other pension funds that hold more cash, are now taking advantage of this forced selling to top up their credit portfolios.

Even the state is getting in on the action. Evan Guppy, head of LDI and credit at the Pension Protection Fund, a bailout fund for defined benefit schemes, said he was looking at buying opportunities. 

Pension funds are also looking to exit less liquid assets, such as property and private credit funds, the consultants said. 

“Yes it is still happening, and a good thing too,” said Van Lanschot Kempen’s Patel, referring to the asset sales. Yields have been creeping up in recent days and those sales will result in further collateral calls soon if they don’t reverse, he said. 

If the funds can manage to weather the market volatility, higher yields represent good news for most defined benefit schemes, according to PwC. The funds in aggregate had either £155 billion or £295 billion of surplus assets at the end of September, depending on the measure used, according to the firm’s analysis released this week.

“The current funding position for UK DB pension schemes highlights that, despite unprecedented economic and market volatility, schemes are actually in good health overall,” according to John Dunn, head of pensions funding and transformation at PwC. 

What Bloomberg Intelligence Says

The Bank of England’s purchase of £65 billion of gilts is only a temporary fix. Liability-driven investment and a shift to illiquid assets -- the solutions promoted by investment managers like Legal & General, Insight and BlackRock to help defined-benefit pension plans manage falling interest rates -- may have helped solve one problem only to give rise to a deeper systemic risk.

-- Charles Graham and Kevin Ryan, BI analysts

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(Updates with yields in sixth paragraph. A previous version of this story was corrected to remove “state-backed” from the description of the bailout fund.)

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