Yesterday brought the nation’s attention to the work of select committees, mainly due to the “grilling” of Boris Johnson by the Parliamentary Privilege’s Committee. It was hard not to notice just how professional that Committee behaved, how well briefed it was and the contrast between its conduct and that of Johnson and (at times) some of his supporters.
Other Committees are available and earlier in the day, the Work and Pensions Committee discussed with Andrew Griffiths Economic Secretary of the Treasury and Laura Trott, Minister for Pensions, lessons that could be learned from last autumn’s LDI crisis.
Tomorrow at 09:30am we along with the @HLIndustryCom are hearing from @DWPgovuk and @hmtreasury about defined benefit pensions with Liability Driven Investments.
🔎Read about the session here – https://t.co/nLATOWBUdl#pensions
— Work & Pensions Committee (@CommonsWorkPen) March 21, 2023
Even more previous sessions , the Committee’s gloves were off. This was partly due to it being reinforced by Baroness Sharon Bowles who, along with Nigel Mills and Lord Burns, asked many awkward questions that the House of Lords Industry and Regulatory Affairs Committee have been asking since October.
The tone of Government has also changed. In the early days of the Work and Pensions Committee’s inquiry, there was emphasis on treating the LDI crisis as a one-off, caused by freak circumstances. There is now recognition that the LDI crisis was foreseeable and that the risks of leverage were not properly recognized . Andrew Griffiths suggested that LDI formed part of a wider review of “secondary banking” , resulting from the lack of data held on LDI in DB pensions and the inadequacy of stress testing on the collateral buffers held.
If Johnson had been as concise and to the point as Trott, his session would have been half the length.
Many questions remain unanswered by DWP/TPR. These focus on three areas
- LDI and the crisis
- Legality of LDI
- The DB Funding Code
To these, we might add, the impact of LDI on DC scheme design – a matter that was mentioned by Laura Trott twice. There are obvious similarities between the herding of DB schemes into de-risking strategies and the similarities of DC defaults, almost all of which see a shift from equities to bonds in the run up to “retirement” – in the saver’s interests.
“Risk isn’t monolithic”, Bowles pointed out, when talking of the accounting of DB pension liabilities valuations “it waggles around”. The same needs to be said of the risks that DC members take, we do not have an “end-game” called “retirement”, our pension plans also waggle around.
The two hour conversation gave us a number of insights
We still do not know which schemes could not keep their hedging in place and were the primary casualties.
There was frustration about this from the Chair and from outside the room
The government “does not have sight” of the pension schemes that lost out from last year’s LDI crisis, said pensions minister Laura Trott.
It is now 6 months since the LDI crisis.
— Josephine Cumbo (@JosephineCumbo) March 22, 2023
Nor has there been any detailed analysis published by either DWP or Treasury on the financial impact of LDI on DB pensions as a whole. Nor is there yet clarity on what the loss is to the tax-payer, since much of the £400bn decline in the DB asset based (calculated by the PPF) was taxpayers money, paid by means of incentives and reliefs. Con Keating and Iain Clacher continue to hold that the loss experienced is £500bn and their analysis continues to inform the thinking of the Committees. I hope it informs the Treasury and DWP too.
Nor do we have clarity over whether the practice of borrowing through the Repo and Swaps market is determined a tactical or strategic decision by Government. It seems legal for leverage , using these markets and instruments, for tactical risk management but it remains unclear what the legal position of maintaining leveraged LDI within schemes for a decade or more was tactical or strategic. The question of why leverage was maintained as rates rose is a separate but aligned question. What’s done is done, but there remains a lot of leverage from secondary banking and worryingly , much of it is in the private illiquid markets that the Government is keen for DC schemes to access.
Finally, there is the question of whether TPR’s DB funding code and the new funding regulations from the DWP are going to have to be rewritten. The Minister for Pensions hinted that this might well be the case.
The Govt will take into account recommendations from MP inquiries into the LDI crisis last year, before publishing new funding regulations for DB schemes, the pensions minister has said.
— Josephine Cumbo (@JosephineCumbo) March 22, 2023
We should thank both the Work and Pensions and the Industry and Regulation Committees for continuing to ask the hard questions. The WPC session might not have matched the afternoon’s for drama, but it achieved a great deal. It is worth watching to help us understand the position of Government and of those who hold feet to the fire.
On the question of costs to schemes, we get some important statistics from ONS today. Their FPFS survey of schemes as at 30 September. That will give us a good idea of how large the costs of LDI were to that point in time. That is not all of those costs as much rebalancing was undertaken after September 30th and most apparently before 14th October judging from the very low take-up of the Bank of England’s special repo facility.
The PPF recognises that its estimates of scheme assets (for the PPF 7800 index) do not capture derivatives effects or portfolio rebalancing.
2:10pm just watched a replay of first half of yesterdays committee hearing. Comments so far, Baroness Bowles has an excellent grasp of the issues, but it is very worrying that Tom Josephs only has a vague grasp of DB funding (as evidenced by refering to TPR’s DB funds Biannual Valuations requirement). Also worrying that Treasury Minister states that no one could foresee increasing interest rates when both the Fed & BoE stated in Late 2021 that they would move on interest rates and start reversing QE. A lesson learned must be to have civil servants that actually understand how markets & pension funds actually operate. Talking about “the benefit of hindsight” is a great excuse for not doing anything and not have foresight! Will watch the rest later.
Agreed- both!
Listening to the rest of the hearing, it is amazing that everyone being asked questions by the committee think it is OK for pension funds to pay collateral calls which in effect is a bet on the direction of interest rates if the scheme funding level has improved. Paying a collateral call is a LOSS of ASSETS. Would you be happy if you knew your Pension Fund Trustees had been advised to take a bet while the conditions are favourable, but got no advice when the going is no longer favaourable and close out the bet.
Did they consider the regulatory status of those who presented LDI as a suitable investment?