I’ll argue on my blog – not in parliament.

The Work and Pensions  Committee announced the line-up for their sessions on LDI (23rd November).

There’s been a bit of banter about lining up Con, John and Iain and me. Let’s calm things down. We may have very different views on this blog, but when it comes to pensions , we all want the same thing- we want pensions to be paid in full, on time , according to people’s entitlement.

The WPC is asking us to give evidence, not for a panel debate.

This has happened before – it didn’t end well

In early 2018, after BSPS’ Time to Choose, Al Rush and I were asked to speak at this committee alongside the now disgraced Darren Reynolds. Al posted on twitter that he would like to do something unmentionable to Reynolds in the parliamentary car-park and was promptly banned from giving evidence. Looking back – not a smart move.

Which is why I will be focussing not on what divides us, but on what unites us. John has posted what he is intending to talk about.

Which can be summed up by this sentence

“Since leverage is the cause of the whole problem, pension funds should be banned from using leverage, however cleverly disguised.”

I suspect that we , as in the contrarian panel assembling at 9.15 will agree with the sentiment that leverage should be banned and we will agree to differ as to whether the leverage is cause or symptom of the problem.

My personal view is that schemes  over the past twenty years, faced with the choice of demanding greater contributions from the sponsor or risking the wrath of the Pensions Regulator, chose LDI as a means of keeping the peace. For TPR it was a helpful fudge and for employers it was a “put pensions in a box” solution. It allowed the tension created by a mark to market accounting standard in 2004 to be relaxed . So long as interest rates remained low, and allowed everyone to relax, knowing that if cash calls came, schemes could meet them and gladly meet them – as it would mean schemes would have returned to solvency.

This is the consensus view, as expressed in this summary of the Association of Consulting Actuaries’ submission to the WPC committee

Unlike us, the ACA do not see running leverage as a long-term strategy as either the cause or symptom of the problem, they see the LDI crisis as resulting from there being too much leverage in the system. The ACA seems comfortable that the “collateral waterfall framework” in place with most DB schemes was fit for purpose. It was fit for purpose before something “unprecedented” happened, most risk frameworks are.

As yesterday’s blog reported, Sharon Bowles and others pointed out that the only regulator who supposes that leverage isn’t borrowing is the Pensions Regulator. The BOE and FCA routinely talk of leverage as borrowing and Sharon Bowles pointed to the letter of the law which tells pensions “thou shalt not borrow”.

In as much as the ACA command the consensus of the pension industry, it would appear that what we are proposing is an act of civil disobedience , condoned or perhaps orchestrated by the Pensions Regulator. The use of structured products in retail finance is overseen by the FCA and these products need to be tested as part of the Consumer Duty on vulnerable customers. If LDI was tested on trustees as the FCA suggest, would they have been able to articulate the potential risk of September 2022. Clearly they wouldn’t – the 1.6% spike in yields  was so unprecedented that even TPR had failed to model it.

As far as the BOE were concerned, the LDI crisis was not about saving pensions but about saving the gilts market from pensions. The reason that the BOE did not extend its protection of pension hedges beyond October 14th was because it feared pensions would consider they had another lifeboat and could get on with rearranging the deckchairs in their own time.

John Ralfe is absolutely right to point out that the reason why pensions nearly wrecked the gilt market was because of leverage. There appears to be no contrition at the ACA or elsewhere about the wrecking ball that LDI became once it was set swinging. Instead it tells us that LDI remains fit for purpose (albeit with the leverage dialled down).

So I hope that our panel can act as a team and deliver a consistent message that refutes this orthodoxy and challenges the received idea that pension schemes can use borrowing as an ongoing strategy to meet targets of self-sufficiency and buy-out. The glidepath may be a little less comfortable without expensive banking products smoothing the ride, but we cannot continue to tolerate the risks from future unprecedented calamities which force up the long term cost of Government debt.

There are other platforms on which John , Con, myself and Iain can contest questions of long term pension funding, the Work and Pension Committee is not a place for fighting (remember Al). The greater good of DB pensions is what this inquiry is about and the good of pensions is best served by it demonstrating to the BOE, the Treasury and to Government that it is not going to commit in future to strategies that relay on borrowing to succeed.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to I’ll argue on my blog – not in parliament.

  1. con keating says:

    From what I have read John Ralfe, Iain and I are in agreement that the proximate cause of the market disruption was leveraged LDI – we may be in disagreement as to the ultimate cause or motivation, I don’t know, which we see as misconceived accounting practice.

  2. John Mather says:

    Is there a danger of falling into the causation v correlation trap you will be telling us next that ice cream causes sunburn.

    Leverage was not the problem it was the ignorance of where the risk was. Shifting risk has been the pensions game for 50 years. Maybe longer.

  3. Jnamdoc says:

    The flaw derives from the underlying beliefs. TPR (protecting PPF) see DB pensions as a risk and a drain on the economy, to be eliminated, with that to be achieved by swapping the underlying assets for Govt gilts. Fair enough, that is where they come from. It also happens to be convenient for Govts, none of which are brave enough to turn off the tap draining value out of DB schemes. The contrary view is that a funded pension system is and should be an integral part of the growth economy, rather than a drag/

    The actuarial profession has also reacted rather creatively to the criticisms of it in the 2004 Morris Review – in which (as summarised by the FRC) amongst problems with the profession’s role in the pension industry were that it suffered from “… a degree of insularity in its methods and approach; insufficient emphasis on the uncertainties inherent in long-term financial planning;” Morris also considered that actuaries were not best placed to be providing investment advice – it wasn’t the core skill set, and as a collective they tended to be too risk averse and prone, as the ultimate rule followers, to group-think. It seems the professions’ reaction to that has been to slip away from any notion of offering actual investment advice (i.e. prudently allocating money with a considered prospect of realising a profit and return) for an asset allocation model predicated on the ‘least-risk’ route of LDI (no irony intended).

    So, a regulatory mindset to eliminated DB schemes, aligned with over cautious modelling group think, leading to the transition of £3trn of DB value out of growth assts into LDI govt debt. Each to consider if that will drive longer term economic success?

  4. Bob Compton says:

    Jnamdoc sums up the situation succinctly!

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