The PPF’s estimate suggests that 23% of the asset base of Britain’s £1.8 trillion pound funded DB pensions has evaporated during 2022. This is equivalent to 23% of the assets.
What goes down, will come back up but it will require some stunning performance from DB assets to return to where we were at the start of last year.
No surprises why the falls are heavy, Long Dated Gilt and Index linked gilt funds fell by around 30% last year – in line with the fall in gilt prices. While not all of DB pensions were invested directly in gilts or in gilt funds, the concentration of risk was created by schemes doubling or tripling up on their gilt allocations through LDI.
Details of this vast destruction of asset value – a rout equivalent to the economy of Israel or Argentina – are contained in figures from The Pension Protection Fund, the industry lifeboat.
It caused experts to sound alarm bells. ‘There is simply less in the pot to pay pensions from,’ said Iain Clacher, pensions professor at Leeds University Business School.
Of course it isn’t all bad news – pension schemes are now in a much better state to be bought out by insurers, the big idea of the DWP / TPR funding regs. /code.
But there are real losers, not least the taxpayer. That £400 bn (£500bn by other estimates) is real money that was invested by companies with full relief from corporate taxes. It was money that grew in a tax-advantaged way. The tax-payer will now have to subsidise the rebuilding of the asset base if gilt yields fall and what appear fully funded schemes find themselves once again in deficit.
And much of the money lost in the fire sale of assets at the time of the LDI crisis is lost forever, value being transferred to those keen to buy assets on the cheap.
No matter what the views of actuaries and investment consultants, people should be appalled that it cost so much to land the windfall of rising gilt yields. And of course there were plenty of DB schemes (such as LGPS) that stayed away from LDI and did not double or triple down their losses meeting collateral calls
Common sense tells us that borrowing money to fix pension problems is not good economic practice. The £400bn is a big bill to learn that lesson. Sadly DB investors – who can afford to ride out such storms (with the help of the taxman and sponsors) are not alone, DC investors may have lost comparable proportions of their fund – for them it is less easy to see a silver-lining.