“Are unregulated consultants to blame for the LDI crisis?”

greetings from sunny Paphos

Good morning and welcome from sunny Paphos, set in the eastern mediterranean, a hop and a skip from Lebanon, Israel and Palestine. If you begrudge me a week of leisure then I’ll tell you I’ve paid for it through the purgatory of five hours onboard a plane monstered by two young children with the most powerful of youngs and the most indelicate of parents. These things happen!

I am staying at the house of the former head of enforcement at the Pensions Regulator (please note). Which is topical as I am using this blog to respond to the indignant question of John Belgrove, social media doyen and former senior thinker at Aon. John has rebranded himself as “Coddiwomple” – which is to travel in a purposeful manner towards a vague, as yet unknown, destination.

Coddiwomple and I have crossed swords over a question asked by Adam Saron.

Are unregulated investment consultants to blame for the LDI ‘crisis’?

I noticed Alex Janiaud‘s reporting on the proceedings of this week’s Treasury Select Committee, and was genuinely perplexed by the suggestion that unregulated investment consultants were one of the causes of the LDI ‘crisis’. In my head the investment consultants advising pension schemes were, by definition, authorised and regulated by the FCA.

I read the Treasury Committee transcript; both Harriett Baldwin MP and Richard Lloyd (FCA Interim Chair) explicitly refer to a “gap in regulation” of investment consultants. To be fair, Nikhil Rathi (FCA CEO) is more nuanced, and he refers to investment consultants being “more actively regulated”.

I also refreshed my memory of s36 of the Pensions Act 1995, which requires trustees to take “proper advice”. S36(6) helpfully defines “proper advice” as either (a) regulated advice; or (b) advice from someone who the trustees reasonably believe to be qualified.

Although I had clearly forgotten about the second limb of the “proper advice” definition, is it not the case that most trustees seek regulated advice to avoid any doubt being cast on their compliance with s36? Also, is it not true that the majority of pension scheme assets are advised by firms authorised and regulated by the FCA?

What is the FCA on about?

Any answers welcome!

Adam helpfully includes his sources;
Alex Janiaud in Pensions Expert: https://lnkd.in/eQHnmeJ7
Treasury Select Committee Transcript (see Q339 to Q350): https://lnkd.in/etB42Py5
Pensions Act 1995: https://lnkd.in/eXinZtvJ

The answer to Adam’s question, is that the FCA allow actuarial practices to get the permissions to offer their clients investment advice by dint of their professional status and this has been going on for ages. Some investment consultants, notably in the context of LDI, Redington, have chosen to be regulated by the FCA but most investment consultants are only indirectly regulated.

As well as staying in the house of the former head of enforcement of TPR, my other claim to legitimacy in this conversation is that I am directly authorised as an SM3 (senior manager) by the FCA, you can look me up if you like.

John  Belgrove has , after questioning on what grounds I could make the following response to Adam’s question.

Let me put forward a different and undoubtedly unpopular view ( at least with investment consultants).

Most consultants have been getting a free ride when it comes to regulation, using permissions granted them by the Institute and Faculty of Actuaries and operating too high up the ladder of abstraction to give grounded advice.

The laws of common sense told us that the free money from QE was over, but wedded to the ideology of LDI, most consultants couldn’t see what everyone economist was telling them – that trouble was on its way. When the impact of the mini-budget hit, they were caught with their pants down.

The LDI fiasco also showed how prevalent group think is among these clever people. Even at the PLSA conference in early October , I could find no consultant who would accept responsibility for the problem so were indignant when the Bank of England called time on the bail out.

Pension consultants are not a class apart and it’s time they were accountable as other advisers, the FCA are right to be using the LDI debacle to trigger change, had they had early oversight , many of the problems scheme have today, would have been a lot less severe,

I do not need to be FCA regulated to hold this opinion, nor to express it.

Whether they hold actuarial qualifications or not, those who advise occupational pension schemes are appointed because trustees are not supposed to take decisions without taking formal advice. This grants those who can demonstrate both the competence and the regulatory permission to advise with a captive pool which can be fished in for profit.

There is nothing wrong with this , but as the CMA pointed out , when those who are charging for advice then move into the business of managing the money,  the measurement of success moves from advice to delivery. Whatever they might like to say, the fiduciary managers pitched on delivering better outcomes by taking control of the decision making process and by that yardstick let their clients judge them.

I don’t know how the “fiduciary managers”- those who had mandates to buy and sell on the trustee’s behalf, did, relative to those who were only called on to give advice, nor do I know to what extent they were FCA authorised or indirectly authorised through the IFOA. Frankly what matters is how effective they were in protecting their clients assets.

Coddiwample’s reply to my post is typically considered. John, you remember, had initially questioned my credentials..

Henry, indeed authorised in that capacity since Aug 2020 for AgeWage I see which has presumably made your views better (I jest). I’m sure you get my point which is as per Adam. Are the “most consultants” you reference the ones regulated by the FCA or the ones not?
Obviously I’m retired now but my records show I was FCA regulated (various controlled functions) from 2001 to 2020, like most larger firm consultants… (imro before that in asset Mgmt). Your “free ride” comment is worth investigating, as are most of the points you raise in many forums including concepts like “ladders of abstraction”. The answers aren’t always necessarily what you expect though. Ditto re CMA fiduciary investigation etc. As regards timing markets (which is still not what LDI is about) that homogeneous group of economists you found were also predicting rising rates and yields for each of the preceding 20 years. There are different ideologies at play here and all (most) have validity. The orthodoxy that resulted here was more about regulation & accounting disciplines than anything else. But feet should always be held fairly to the fire after problems. Finding fair and informed humans to conduct such inquiries is rarely easy especially when blood is expected.

I have in fact been authorised by one regulator or another since A-day in 1988, other than for brief periods when I worked for actuarial practices.

In my last stint working in consultancy, I helped promote the First Actuarial Best Estimates Index- FABI.

This shows that the occupational pension world, were it working on a forward looking rather than mark to market basis, would have held steady (the turquoise line) over the past seven years. The FABI index shows that over the past year assets and liabilities of pension schemes are competing with each other in a race to the bottom.

In the LDI funding crisis, actual assets depleted even faster than notional liabilities fell leaving First Actuarial view of the “surplus” in the system , quite a lot down (the green line).

My comments include a criticism of the actuarial taking a “free ride” and relying too heavily on their own reputation ,rather than the external scrutiny that they might have received if properly regulated by the FCA (with the PRA looking over its shoulder). Had it not been free-riding and sitting at the top of the ladder of abstraction, it would have noticed that the problem LDI was trying to solve was illusory, on a best estimates basis , the long term funding of liabilities is taken care of by investing in long term assets – real assets, not gilts and certainly not in synthetic gilts.

But instead, investment consultants allowed themselves to move in the herd, two thirds of their clients were committed to LDI programs and stayed committed this year when the army of economists were telling them that interest rates and thus gilt yields were rising to a point where all this hedging was not just unnecessary, but potentially lethal.

Employers were called on for substantial deficit contributions that bought assets, many of which were fire-sold in the recent crisis. Employers have every right to feel bitter. Trustees have every right to feel let down.

My experience promoting FABI in the second half of the last decade is that the investment consultants were not interested in listening to an alternative message to the orthodoxy created by the regulatory and accounting disciplines on which their business model was built.

Consequently, they could not adapt in time when trouble hit and were caught with their trousers down in September. It happens, regulation should make sure it doesn’t happen quite that way again.

Whether directly or indirectly, the investment consultants sold ideas and products ,the impact of which was not properly understood either by them or their clients.

So do I have a right to my bully pulpit?

I do not have the technical competence to conduct an actuarial valuation , nor even to properly understand the mechanics of LDI. But I do have an authentic voice, my voice and I speak for me alone in calling the investment consultancy business out over LDI. They need to be open to challenge and the FCA are able to challenge , so too the Treasury Select Committee, the Work and Pension Committee , so to independent bloggers like me and Coddiwomple.

I have my right to my views, whether regulated or not, and I have the right to express them. The actuarial profession has been keen to narrow the debate on LDI down to those who are in the inner circle.

I would argue that this debate should be had by people who don’t fully understand LDI, who don’t even understand their pension and most certainly by those who have the interest to comment and probe about what is happening to our money.

Exactly the same argument can be used for ESG, if we want to make our money matter, we need to be able to engage in its management. Pensions shouldn’t be a closed shop.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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5 Responses to “Are unregulated consultants to blame for the LDI crisis?”

  1. John Mather says:

    Henry, Have any of these advisers ever been made to compensate for advice which caused loss and do they all carry PI cover?

  2. Byron McKeeby says:

    Sir Derek Morris’s Review of the actuarial profession as far back as 2005 “acknowledge[d] the critical role of actuaries’ skills in assessing long-term liabilities but question[ed] whether actuaries are necessarily best-placed to advise on asset allocation or fund manager selection”.

  3. Allan Martin says:

    And authorised economists?

  4. Victor Mello says:

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  5. ian layton says:

    Maybe selecting a reliable adviser is as easy for a trustee as it is for Jo Normal to select a financial adviser?

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