UK pension funds’ patience and liquidity in the age of market-based finance

Pension funds have often failed to meet expectations in terms of providing ‘patient capital’. Explanations for this lapse have ranged over regulatory and ideational factors. We argue that a new ‘impatient’ phenomenon is emerging that requires further explanation: pension funds are becoming more mindful of their liquidity and collateral management, and engage in pro-cyclical investment behaviour. We show how UK pension funds have adapted their investment strategies, investing significantly in collective funds, including in foreign and in ‘alternative assets’, and setting aside protection assets as collateral for their derivatives and repo transactions. This behaviour has increased pension funds’ exposure to and participation in liquidity spirals, forcing them to dispose of assets during crises and contributing to the overall pro-cyclicality of the contemporary market-based financial system. This was most recently highlighted by the instability of UK government bond markets in September 2022. Drawing from Minsky and the emerging literature on Critical Macro-Finance, we argue that this new pension fund behaviour is in response to structural changes in the financial markets in which they operate.