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.
Writing in the Daily Mail, Patrick Tooher tells his readers – often DB members
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.
PPF 7800 uses estimates based on market averages.
But just how accurate is it?
I compared the latest PPF Purple Book figures (as at 31 March 2022) with the PPF 7800 estimates at that date, with the following headlines:
Purple Book assets £1.6669bn
PPF 7800 assets £1.7215bn
Purple Book average funding level 113%
PPF 7800 funding level 111%
Based on just one comparison it could be argued that the PPF’s asset estimate at end of 2022 may be overestimated, and the asset loss for the year underestimated, while the so-called funding level is what it is, for what it’s worth.
Perhaps Clacher and Keating’s asset loss estimate of £500bn since January 2022 is not so far out after all?
No doubt fellow correspondent John Mather is watching all this with close interest as he keeps asking whether that £500bn is accurate or not.
I never get an answer which makes me even more concerned. If they don’t know even more worrying.
When you find out the real cost of LDI you might have a better idea of the problem,
Does not give confidence in collective schemes of any description,
It does underline the need for those giving investment advice to be regulated
We believe that the PPF 7800 figures understate that actual decline in scheme assets over the year 2022. They show a decline of £219 billion from December to June, of which £121 billion occurred in the April to June quarter.(12% over the six months) By contrast the ONS FSPS shows declines of £346 billion of which £250 billion occurred in the second quarter (19.2% over the six months). The PPF reports scheme assets of £1.45 trillion at end September- we believe that the June gap of £127 billion will have widened to £180 – £230 billion, leaving scheme assets at end September in the range £1.22 – £1.27 trillion range – a decline of 30% – 33%. This is consistent with results such as those reported by the Bank of England and the BT scheme and less than the 40% reported by some small schemes. It is profoundly different from the 22.5% reported by the PPF – that would have required an LDI hedging ratio of less than 50%, given the relative performances of different asset classes. USS is claiming a 22.2% decline but that is accompanied by some remarkable claims for positive private investment performance. We will get a clearer picture when the ONS releases the figures for September in March.
One thing is absolutely clear – the biggest loser has been the tax-payer – schemes had the tax relief on the £400 or £600 billion when building up the asset value lost this year (say £100 billion)and they will get it again before pensions are paid (say another £100 billion) – so £200 billion of total tax subsidy on that £400 – £600 billion of private pensions.
When thinking about the taxpayer as the loser, it should be noted the taxpayer got £3.8bn back during 2022 sucked out of pension schemes due to the LDI Crisis and the BoE intervention. It was also stated that this was disproportionately borne by smaller schemes used pooled leveraged LDI vehicles – so the impact on those schemes / employers of the fall in assets value will be greater. In many cases these employers are not paying Corporation Tax anyway due to low current profits or indeed losses and there are also likely to be brought forward losses from the pandemic, so there is little effective tax loss from the restitution payments. So the main loser are the Members who have an increased likelihood of being on PPF level benefits or a reduced possibility of receiving discretionary increases to restore the real value of their pension in an inflationary environment.