While the pensions industry continues to live under the pall of the LDI blow-up, the PPF have confidently explained how they have managed the problems that arose from the spike in gilt yields in September.
Speaking to me at a Pension PlayPen coffee morning, Evan Guppy , who runs PPF’s liability driven investments spoke of 2022 as being “business as usual” with LDI achieving a more profile internally , with none of the concerns that have dogged other schemes.
Key to this appears to have been the PPF’s control of their own positions. Rather than using intermediaries, they cut out both consultants and fund managers writing their own derivative contracts with managers enabling them to post the collateral that suited them and allowing them to anticipate cash-calls rather than having them arrive unexpectedly.
The PPF also appears to have maintained a 200 basis point collateral buffer which meant it was not involved in a fire sale of illiquid assets to meet margin calls and while it is now considering reinforcing the buffer to as much as 300 bps, it still sees economic advantage in the use of leverage.
While there are those of us who remain concerned about the use of leverage as a means of creating the headroom to invest in growth assets, the LDI’s approach does look less fallible to the black swan event that Guppy said might return in the months and years to come.
It would also be interesting to hear from the Pension Regulator what it has learned from the conversations it has had with PPF on this matter. In considering its ongoing position on leverage, it needs to work out whether requiring schemes to load up with gilts has been or will be in their interest.
TPR should ask whether the PPF is an example for others or a warning that unless you follow the PPFs approach , leveraged LDI creates rather than mitigates risk
The true cost of LDI must include the cost of the buffer
The PPF is in the fortunate position of not having to chase after returns to keep it solvent. By one estimate it has an £11bn excess of assets over liabilities which makes its targets of self-sufficiency from the industry levy that has supported it, achievable in short order.
Guppy spoke of protecting the PPF’s balance sheet (rather than those organisations from which it receives fees). A less generous view of a 300 bps buffer is that it is a reserve that perpetuates the needs for ongoing fees and is a luxury that few comparable schemes can afford. Indeed it makes it harder for other schemes to meet deficit contributions because it adds to the P/L strain pensions put on employers (and further reduces employer capacity to pay defined contributions).
So maybe I could have pressed Evan Guppy a little harder here. Leveraged LDI’s cost benefit analysis must include the opportunity cost of not investing that buffer in productive assets or schemes that pay the PPF’s levy will question whether that levy is not putting the PPF in easy street.
The true benefit of the PPF must include investment in productive assets
In as much as the PPF has the capacity to do so, it must first secure the full payment of pensions as promised to its members. That capacity cannot be compromised by unnecessary risk-taking, but if we are to accept the PPF’s choice of using LDI to lockdown interest rate risk, so we should demand that the headroom that LDI creates is used to invest productively. I look forward to hearing from the PPF at a future Pension PlayPen session how it goes about doing this.
Is the PPF offering its stakeholders Value for Money?
The PPF has chosen to dispense with third party fund managers and buy assets and insure liabilities directly. That makes it unique among public funds in not relying on the fund management industry (it should also be noted that it does its own record keeping and manages the pension payments to members itself).
This is bold and imaginative and allows the PPF to become a benchmark for more intermediated schemes to establish whether their use of intermediation is value for money.
This is not just a matter of establishing the savings in outsourced fund management but requires measurement of the upside in direct access to the counterparties of derivatives and the repo market , as discussed by Evan Guppy.
Events such as a Pension PlayPen coffee morning can do little more than give us assurance that questions such as those discussed in this blog are being addressed. I will be posting a video of Evan’s conversation with me shortly. You will be able to judge for yourself whether the PPF is properly conducting its liability management.
But the fact that it is prepared to come and talk to its stakeholders as it did yesterday, is a sign of confidence that suggests to me that it will continue to be transparent in these matters.
There are very many areas of public pensions where such an open approach could be developed, but judging from the plaudits Guppy received from some of LDI’s harshest critics, his approach both to LDI and to the public discussion that is following the events of late September , he has been an excellent ambassador for his fund and for the investment approach it has adopted.
We can feel more confident that the PPF is offering us value for money, the more it contributes in this way.
Financial Times coverage of the session
The FT has produced an independent account of the event, thanks to Maria Espidanha and Chris Flood for being part of the healthy conversation that has grown from the session already.