It was unsecured borrowing that sunk Trussnomics, and unsecured borrowing nearly sunk our corporate DB pension system. Pension Schemes should not borrow , save in emergency. We should never forget how close our pension system came to calamity through the extension of LDI to the moral hazard it became. Pension Schemes are only partial casualties of this crisis, thanks to the intervention of the BOE. They have unwittingly become the catalyst for change and need to reform the way they organise their funding in the light of the damage leveraged LDI can do.
Interesting the Chancellor also met the head of the Debt Management Office last night…suggests that these announcements could have a material impact on the remit for financing – it went up £72bn on day of mini budget. As I recall it was this press notice that triggered gilt rout pic.twitter.com/xhEO6IVMrl
— Faisal Islam (@faisalislam) October 17, 2022
The that some had feared would follow the end of Bank of England support for gilts failed to materialise. What materialised instead was the unexpected end of the moronic Trussnomics, and the return to an economic policy close to that pursued by Rishi Sunak.
We should not forget this document, which as Faisal Islam says, created the surge in bond yields which unnecessarily damaged the investment strategies of most of the 5,700 defined benefit strategies in place for corporately sponsored DB plans.
Unless hedges and the collateral posted to support them, had already been abandoned, money in collateral accounts will be returned, synthetic equities gilts swapped for physical holdings and lines of credit closed down. Some borrowing is likely to continue but – save for schemes with the strongest covenant, not at pre mini-budget levels.
In time, we will come to consider leveraging gilt holdings a form of borrowing and an inquest into the crisis could and should question why this is either sensible or legal.
We may never know the damage that has been incurred by smaller schemes whose access to LDI was via pooled funds and whose holdings in these funds is unsure. Whether we do will be down to disclosures both in scheme accounts and by the Regulator who clearly had no idea over the past few weeks and was reduced to making bland assurances that “all will be well” on the weakest of evidence.
It already seems unconscionable that fiduciary managers needed to blow the whistle on LDI to get the support of the Bank of England, that nobody in the Treasury thought of the risk that a spike in gilt rates would have on the trillion pounds “invested” in gilts and their derivatives. It seems unconscionable that the Pensions Regulator had waved through schemes carrying the levels of debt they did and that schemes pursuing strategies relying on long-term growth were corralled down a fast-track towards “low-dependency”.
One U turn down- another to go.
The end of Trussnomics , coincided with the end of the DWP’s funding regulations consultation; one U-turn should mark another and whoever is DWP Minister of State and Pensions Minister when the political dust settles should do to the draft regulations what Jeremy Hunt did for the Strategy for Growth- rip it up.
Pension Schemes are being fast-tracked towards self-sufficiency with the same zealotry as Truss was marching us towards growth. Ironically , the outcome that is being pursued by the draft regulations would not result in the productive use of pension capital but its lockdown in insurance policies. But the ideological zeal in the draft regulations. (also featuring in the various incarnations of TPR’s draft DB funding code) are as damaging and nonsensical as that which drove the proposals in the mini-budget.
If we can U-turn a funding strategy for the nation’s growth, we can U-turn a funding strategy for pensions decline.
Lest we forget
Con Keating and Iain Clacher have written a fine piece which is now published on my blog. They say that
If we forget the trauma of the past few weeks and revert to the narrative of the DWP’s funding regulations, TPR’s DB funding code and the rigid application of the accounting standards in PA2004, we will persist in unnecessary de-risking of DB schemes and the spurious matching of most DC lifestyle strategies.
Yesterday I was told off by a friend in Government for celebrating the decline in long dated bond yields. Apparently a reduction in the rate we the tax payer borrow money through our Treasury and through our mortgages is secondary to the artificial construct of DB funding levels and the temporary inflation of annuity rates. I was shocked and I hope that he will be shocked when he reads this.
The LDI crisis should be a shock to pensions as the lending crisis of 2008 was to Banks. Pension schemes should be funded over time and with patience not fast-tracked to buy-out. The long-term stability that Jeremy Hunt is asking for, depends on pension schemes being able to invest over time in patient productive capital without the worry of cash-calls for collaterisation. We do not have to mark our assets and liabilities to the daily market, pension schemes should contract to a single target rate of accrual which should not be linked to gilts but be based on the underlying growth in assets needed to meet liabilities.
Moving to an absolute return with support from a sponsor underwritten by third parties is – happily – under discussion at this morning’s Pension Play Pen Coffee Morning.