The state lending to its own citizens’ pension funds at negative real rates was always going to come back to the state balance sheet at some point.
The problems of LDI will continue playing out over decades to come.— George (@George63493297) December 11, 2022
George is worth a “follow”.
Water under the bridge?
Alex Brummer, writing in the Daily Mail, suggests
The belief in the City is that, because markets are now becalmed, it is water under the bridge.
Not for pension fund trustees sitting on big deficits and having to rely upon sponsoring companies to come to the rescue.
We should be careful to avoid “status-quo bias” and return to leverage in a diluted form. Simply dialling down the borrowing means more dead assets sit in the collateral buffer and less money is invested in productive capital. This doesn’t help members of occupational schemes who are already well protected from losing benefits, first by scheme funding and in the worst case, by the PPF.
It certainly doesn’t help sponsors of the DB schemes who soldier on with the more expensive leverage suggested by tPR , consultancies and LDI providers (at recent WPC sessions).
It doesn’t help the Regulators , for whom the LDI blow-up is a serious embarrassment. While the current 300-400bp collateral buffer is a short-term fix, it is not the long-term policy solution that the DWP is grappling with , as it plans to launch its revised DC funding regulations.
Reading the WPC submission of Dixon International Group over the weekend, I was reminded of the price we have paid for de-risking pension schemes. This medium sized company has been taken hostage by its pension scheme and by the demands of trustees egged on by a zealous regulator.
The actuarial demands on my company almost put us out of business and several times pushed us into loss….The system as it stands is unfit for purpose and has damaged our collective fortunes gratuitously. We have been a zombie manufacturer, existing to serve the pension with nil investment in talent, plant, diversifying etc.
Dixons International has paid a high price not to take on LDI, other much larger DB schemes complain privately of being bullied by TPR (and consultants) into taking out LDI, and swapping growth for matching strategies by loading up on gilts.
The debate is not over, the House of Lords, through its Industry and Regulation Committee and the House of Commons through the Work and Pensions Committee continue to ask the awkward questions that this blog has been asking for some years.
We have been living in a climate of fear created by the way we value our liabilities. Using a longer-term means of valuing assets that discounts liabilities by the average return of scheme assets (and not a version of the gilt rate) would have led to a much less stressful experience than that of Dixons International.
By moving away from valuing liabilities on a present value basis – using the risk free rate, we can and should be able to take a longer view of pension funding.
This would demand some courage from DWP and TPR as it would mean accepting that the status quo that has been maintained since 2004 has not worked and that those who argued for a system of best estimates of scheme returns – as a means of measuring the funding requirement – were right all along.
I have no skin in this game, I do not work for a consultant, am not a trustee but I am a member of a DB pension scheme. I see the loss of £500bn this year, resulting from leveraged LDI as a wake up call. Business as usual from DWP and TPR is not an option,