It now appears likely that the person who blew the whistle on the impending catastrophe facing UK pension schemes that have de-risked using LDI was Kerrin Rosenberg of Cardano who the FT report wrote an email to BOE Governor Andrew Bailey marked titled “urgent message” . In the words of Jo Cumbo and Chris Flood
Cardano Investment, which manages LDI strategies for about 30 UK pension schemes with roughly £50bn of assets, said it had written to the BoE on Wednesday. “If there was no intervention today, gilt yields could have gone up to 7-8 per cent from 4.5 per cent this morning and in that situation around 90 per cent of UK pension funds would have run out of collateral,” said Kerrin Rosenberg, Cardano Investment chief executive. “They would have been wiped out.”
“Wiped out” means , having to sell so many assets to meet the margin call that the scheme’s strategy, carefully constructed, is destroyed. It’s like a ship losing its navigation system and its engines .
We now have the unedifying sight of other fiduciary managers who did not blow the whistle , promoting their narratives in a different way. Speaking to Professional Pensions, Russell Investments head of strategic client solutions David Rae said:
“I think the reality of fire sales of quality assets is largely overstated.”
Andrew Clare, an academic at Bayes Business School also seeks to downplay the events of the past few days
“For those schemes that are fully hedged against interest rate movements, recent events would have left their funding position largely unchanged. For schemes that are partially hedged, the rise in interest rates would almost certainly have led to an improvement in their funding positions.”
Where academics fear to tread
The story of what happened on Wednesday morning is partially told in this chart
So far, ongoing visits to the Repo market with £5bn a day to spend has kept the 15 year gilt rate at below 4.5% but there is a thin line somewhere above 4.5% that will trigger further cash calls that can best be described as the tripwire to a ticking bomb.
So pension schemes live in fear. It’s the fear that carefully constructed positions will need to be liquidated with buyers happy to pick up bargains in a fire-sale. That fear has not gone away and won’t – despite the best efforts of Russell and others. And we should not suppose that because public funds have been committed to bailing out the fiduciary managers and trustees who bought into LDI, the BOE is an extension of the PPF.
The reality is that LDI, like CDIs in 2008, has put our financial system at risk. On that, Ros Altmann is right when speaking of this after the BOE intervention. Unfortunately, Ros wasn’t saying these things before the crisis. That was left to Con Keating, Iain Clacher and a few brave finance directors , pension managers and trustees who did not buy LDI and spoke out against its potential to do harm.
We have 11 more business days where the BOE will buy repurchase gilts. After that the market will need to stabilise if it not to revert to rates of 6% or above. There is little confidence being drawn from the statements of Liz Truss or the Chancellor. While academics may predict that the market “will leave funding positions unchanged“, they do so from an ivory tower disconnected with reality.
The reality academics and fiduciary managers do not have to face
Here’s Claer Barrett, speaking with her usual gusto.
In the seven days since last week’s “mini” Budget, the cost of living crisis is fast turning into a full-blown financial one. I am sure readers are deeply troubled by this, yet our government appears indifferent. The question is, for how much longer can they ignore our distress? As mortgage rates soar and pension funds wobble, the new chancellor’s “gamble” of borrowing to fund unnecessary tax cuts is a bet that Middle England now finds itself on the losing side of.
The fear that stalks pension funds , so fear stalks living rooms, kitchens and workplaces
…households will be spending hundreds of extra pounds per month on mortgages much sooner than we expected. People’s happiness now directly correlates with the length of their fixed-rate deal.
Who will pick up the bill? Will we pay through lower house prices (acceptable if painful) or will the low-earners pay through lower benefits and a further attack on the state pension’s triple lock?
Who is our audience?
One of the questions Fiona Bruce asked us , in preparation for the impending PLSA conference session we’re doing, is “how would you describe the audience“. I can see the attendees on the PLSA app and Emma Douglas did a good job at describing what they did.
But my answer was not vocational but emotional, I described our audience as “fearful“.
I have never known a time when people are more worried about their personal security and the security of the pensions they manage than this week.
Thankfully we had Kierran and maybe a few others to send out flares as the ship approached the rock. Sadly, there still seems inertia and complacency , masquerading as the “voice of calm authority“.
That will not do, we need to take a long hard look at this concept of risk, both in DB and DC. The public will be looking to us for help and we need to find better answers.
Meanwhile we have much to thank Kerrin Rosenberg for, and much to thank those who have been managing this crisis scheme by scheme. Al and I are both close to them!
“No plan survives first contact with the enemy”.
Henry’s blog about the crisis facing defined benefit pensions lays bare the elephant in the room – the artificial suppression of gilt yield had to stop some time. I bet scheme managers are earning their money this week. https://t.co/MHQrg4lujO
— Rush (@exRAF_Al) September 30, 2022
Long only pension schemes have nothing to fear.
Buyers of derivatives they barely understand should look at ways to dismantle them and have an easier way to manage pension assets, long only.