There were two quite separate dynamics to today’s Pension PlayPen coffee morning.
Speaking on behalf of the millions of members of workplace pensions scared stiff by talk of a pension crisis was Tom Selby, head of retirement policy at AJ Bell and speaking back at him were a number of experts on LDI led by Con Keating but including Jon Spain and John Hamilton.
The common theme was “mis” or possibly “dis” information. Has the public been misinformed over the nature and consequences of the crisis in LDI. For the purposes of this article. I’ll define misinformation as careless with the truth while disinformation is the deliberate telling of lies.
In Tom’s view, the “waterfall of information” from the BOE to broadcast journalists through to the broadsheets, tabloids and trade press created misinformation because the subject matter was complex, the consequences obscure and ultimately because there is a story that needs to be told that cannot bide too much “nuance”.
In Con’s view, the telling of the story of the breakdown of LDI is – if not a conspiracy of lies – certainly a deliberate perversion of the truth.
As chair, I was left to conclude that the public and most people in pensions are not well informed about the consequences of the surge in gilt yields and the crash of gilt prices and have not not had access to good quality information from top to bottom. If we take the point of information to be guidance, then the guidance from the Bank of England, the Government and the media has been lacking and frankly whether that is because of laziness, lack of bandwidth or because of a deliberate attempt to hide the truth – the end result is damage to pensions.
Tom Selby’s time spent answering the calls of those frightened by reports of a pension crash is recounted in this story in Money Marketing.
It is the mark of a very good journalist that he or she can make a complex subject accessible without dumbing it down to a point where we get misinformed. This is how a very good journalist describes Liability Driven Investments (LDIs)
LDIs are designed to hedge off the risk associated with gilt yield movements. At a simple level, that means when gilt yields fall and the accounting value of liabilities increases, the investment bank running the hedge will pay the scheme money. Conversely, when gilt yields rise – as we have seen recently – the scheme has to pay the investment bank.
This worked fine during an ultra-low gilt yield environment but became a problem as yields spiked in the wake of the mini-budget – particularly for those LDI funds that had leveraged positions.
As a result, some LDI hedges demanded huge sums of cash, with the risk the gilt sell-off precipitated by the mini-budget would be made even worse by pension funds dumping gilts to post extra collateral. What we saw was therefore a gilt crisis involving a specific type of investment held by a specific type of pension scheme, rather than a crisis that posed any direct risk to people’s pensions.
Bear in mind that Tom is riding for financial advisers who understand what a hedge is , a pension liability is and a gilt yield is – this is clear information that guides advisers to an understanding that this was not a crisis leading to insolvent pension funds , rather one that threatened the stability of the gilt markets.
Talk of pension funds becoming ‘insolvent’ or pensions being at risk was, at best, hyperbole and, at worst, entirely misleading. It is the strength of the employer that is paramount when determining whether or not a DB pension promise will be paid – and even where this is compromised, the PPF provides a valuable safety net.
Employers stand behind pension promises and the PPF stands behind an insolvent employer to provide a safety net.
The problem identified by Tom is that on the buy-side of the story are punters who have no idea whether their workplace pension is going to provide them with a pot of money or a replacement income, or whether their pension is invested or provided by the taxpayer. To quote the OFT some eight years ago now
So how can employees in workplace pensions seek reassurance about the pensions they are in? What are the solutions?
Firstly we need better direction from the very top , in this case , the Bank of England, the DWP and the Treasury. For various reasons , mostly connected with the crisis in question, all three have been preoccupied. But none has been able to put out a sensible briefing that explains how a pension crisis involving the solvency of (LDI) pension funds is not going to damage people’s retirement prospects. Simply telling people that their pensions are now safer because gilt yields are higher is meaningless.
Part of the problem we have with communicating this LDI crisis is that we refuse to tell the story in a credible way. People do not believe that a pension crisis is not a crisis for their pensions (something that Tom repeated several times)
The reality is that the actions of the Government (the micro-budget) have weakened most people’s pensions either because they held gilts and bonds in their DC plans, which were worth less when gilts plummeted in value) or because of the collateral calls from leveraged LDI which forced many schemes into a fire sale of investments or simply because the economic situations of those in workplace pensions have or will hit savings levels and/or drawdowns. There is no upside to the 1.6% increase in the cost of Government borrowing at the end of September or the intervention of the Bank of England both of which mean that the country is more indebted and our pensions in real terms – weakened.
Unless these consequences of the crisis are accepted, people will continue to see what is being told them as a cover-up.
Here we move into areas which may be called disinformation. If – for the purposes of keeping a lid on a crisis, participants deliberately conceal what is going on, then they risk pandemonium from dodgy information. People will infer that their schemes are insolvent even if (and especially if) they are told that there is no problem.
I will return to the PLSA conference and the silly attempt to bounce the Bank of England into extending the support for DB pension schemes which told the market that the pension schemes were not ready for the October 14th deadline. At the same time that the PLSA pressed this panic button , they were reassuring us that there was no problem. Is it any wonder that people were baffled.
This purposeful attempt to calm the general public only led to what Tom calls “pensions pandemonium”.
The solutions to problems such as the one pension schemes were facing is to tell it how it is and let the public decide based on the guidance they take from the facts. Failing to provide a clear factual account of what was going on , meant that the likes of Robert Peston briefed his viewers that pensions were in danger but that could have been avoided.
Meanwhile those pensions that were in danger , had it not been for calm brought about by the BOE, were given signals from the Regulator, the PLSA and the docile pension press, that there was nothing to worry about. Which is why so many schemes did run out of runway and became forced sellers – or even lost their hedge and their collateral.
As any good punk knows, the way to convince people is with the truth, bullshit will out. The solution to the problem people have with pensions lies in transparency, You cannot dress up the truth , we must learn to explain the complex with the skill of Tom Selby.