Burnt at the stake – the 2022 “lifestyle” fiasco is no joke.

Over the Christmas period , Japan decided to join the rest of the world and call time on “free money”. You now have to pay to borrow in Japan as you do the rest of the grown world over. I never thought that paying a rate of interest would be news but it is.

Whether you are a mortgage payer or a Government looking to build your pandemic ravaged economy back better, you will have to pay for the money you are borrowing and if you haven’t got savings after getting a free ride for the past ten years, more fool you.

That at least is the tone of the FT’s article tweeted above which poured scorn on those who predicted QE unwinding  would inevitably

“cause financial chaos on a massive scale: bond fund runs, bank collapses, pension fund insolvencies, human sacrifice, dogs and cats living together, mass hysteria”.

Everybody saw this coming it seems, everybody that is except the retirement savers in default funds lifestyling into highly priced bonds which were about to lose up to half their value as people decided they didn’t need to pay for a “guaranteed loss account” (my definition of a bond yielding less than zero), You buy gilts and bonds now and expect to get your money back by redemption.

Everybody saw this coming except the defined benefit pension schemes that had borrowed to get more of the high octane juice that powered ultra low discount rates that pleased the regulator and kept the company’s pension scheme a tamed beast in the garage.

Savers and trustees alike were tied to the stake of highly priced negatively yielding bonds as an article of faith to “financial prudence”.

Well not everyone, look at the returns of some of the master trusts in 2022 and you will see that one or two got out of bonds and kept their defaults invested in growth assets.

Not all DB schemes loaded up on bonds through leveraged LDI and those who didn’t prospered. The LGPS prospered and so did open pension schemes who refused to tie themselves to the stake and be flamed by rising interest rates.

The vomiting camel graph – as the FT Alphaville team call it

So what has become of all the market value that in 2021 ensured that long dated and index linked gilt funds were “top performers” for wealth managers, workplace pensions and the institutional investors in DB schemes.  Whether it be north or south of £500bn, that loss of value is the price of taking the lid off the jar of “free money”.

For the FT Aphaville’s team , the story is that there is no story

now that this era has finally passed, we should take a moment to reflect on how remarkably smooth the demise of negative-yielding debt has been.

Well pension schemes have been keen to promote the silver lining (and not talk about the cloud)

The consolation that we can now mark down the value of our pension liabilities will only give  short-lived respite. The new lean pension schemes are decidedly short of muscle.

As Nigel Wilson told the House of Lords Industry and Regulation Committee, don’t expect to see buy-out pricing coming down, schemes may be technically solvent but they’ve shed more than a few pounds. The insurers are not going to give DB “savers” a Brucey- Bonus out of what’s left of assets they take on over the next few years.

Many DC savers face substantial losses from  lifestyle funds invested in sub-zero yield  bonds in “retirement protection” mode.  DC savers who are at the end of their savings adventure,  deserve an  explanation. If everyone knew that the bond markets were going to be flamed, why were millions of savers tied to the stake in bond based default funds?

The damage done to savers by “lifestyle” funds is serious and irreversible. While the pension industry calls for higher contribution rates, it has serious questions to answer about what it has done with our savings defaults.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Burnt at the stake – the 2022 “lifestyle” fiasco is no joke.

  1. Richard Bryan says:

    What was the duration of the bonds in the ‘lifestyle’ funds? Surely that should match the expected retirement date, so that those close to retirement should not have experienced much of a loss? Or were standard bond funds used, with a rather longer duration…. in which case why brand them ‘lifestyle’?

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