The Minister of Pensions and Growth took his seat at the PLSA conference at around 11am on 12th October in what appeared to be a fireside chat with the PLSA’s politics person Nigel Peaple.
In the three weeks since the disastrous mini-budget, pension funds have sold over £200bn of “growth assets” in order to meet the collateral calls from their LDI programs. The question being asked in my row was how Alex Burghart felt he had done so far.
Sadly the Minister was wheeled on and off stage and we were left none the wiser as to what he meant by growth and where he expected it to return from.
Later in the day, the FT’s website ran as its lead story
Push to put pension cash to work boosting UK growth hit by gilts crisis
Luminaries such as Kirran Rosenberg and Steve Webb lined up to point out the much-flagged government initiative is at risk as retirement funds are nofiw ghting shy of illiquid assets
Small wonder, many are reported to be unable to sell illiquids and are having to sell discounted gilts or lose their hedging. The Government’s growth strategy has put pension funds into reverse gear, all the promise of the past 24 months has been swept away by the fire sale of assets its micro-budget has triggered.
In degrees of calamity, this does not rank alongside the impact on mortgage rates and the Government finances – occasioned by the gilt rate once again exceeding 5%, but that eventuality happened again yesterday to the consternation of the majority of the audience who respectfully greeted its Minister’s first public appearance.
The small hope the PLSA had in the morning that the Bank of England would give pension schemes further grace to get their house in order beyond Friday was dashed when the BOE’s Financial policy committee met and confirmed that the BOE’s buy-back of gilts will end tomorrow (Friday 14th).
In the late night bars that surround the PLSA’s Liverpool conference , talk was about which of what are being deemed the “planks of trussmoronics” would be ripped up first.
The lady’s for turning
Despite the day before promising cuts, Liz Truss told the House of Commons there would be no cuts. Despite the IFS suggesting that the Government’s growth agenda will get “nil points” at the end of the month unless £60bn of cuts can be found between now and then
But as there have been as many u-turns this month as there have statements of intent, nobody in the late night bars seemed impressed that there was any attention being paid to the detail of the crisis. The Prime Minister and indeed the Minister for Pensions and Growth seemed to be just posturing.
Clearly we cannot have tax cuts, hand-outs and no spending cuts and have economic credibility. Without credibility, pension funds risk being exposed to a continued rise in gilt yields , meaning more support from sponsors, or more selling of growth assets or loss of the hedge. As mentioned yesterday, while pooled funds offered limited liability (you can only lose the value of your holding in the fund) , segregated accounts have unlimited liability. If you subscribe to the view that there is no end to the Government’s folly, had better have deep pockets or have closed their positions.
Telling it as it is
My response to the question – “should the BOE extend support to pension schemes after the end of this week?” put to me on a panel chaired by Fiona Bruce was “no”. This was not met with much joy by the audience and I spent much of the rest of the day getting disapproving looks from many fellow delegates.
My argument was taken from that old adage among criminals “if you can’t do the time, don’t do the crime”. Pension funds have to find their own way home, if they used derivatives as a long-term investment, I think that was ill-advised and I think the Regulator allowed LDI to become BAU without a proper assessment of the risks, now comes the reckoning.
The reckoning
The people at the PLSA conference are not the people actively involved in selling down assets and managing hedging strategies, though there were a large number of delegates spending much of the day on the phone or reading news articles rather than listening to the debates.
Today and tomorrow will be a reckoning for pensions and the two weeks that follow will be the reckoning for this Government.
Growth cannot come out of economic capitulation and if the Government’s cost of borrowing so escalates that it cannot afford its current spending program then there will be no growth but recession and possibly a slump.
Hope for growth?
As well as being an embarrassing day for Government, yesterday was embarrassing for the Bank of England and for the FT. The BOE had apparantly briefed the FT that there would be an extension of its support for gilts and this didn’t happen. Robert Armstrong mused on this overnight and concluded that the general chaos did not seem to be reflected in a long-term risk premium that the UK would have to pay for its Government’s (and central bank’s behavior)
His conclusion gives some hope that once all this is sorted out and pension funds, mortgage payers and those dependent on public services and benefits have been delivered our pain , things may return to normal
The UK does not have a monopoly on bad governance, even at this chaotic moment. The bond market may prove surprisingly forgiving.
