While most of us would see weight loss as a good thing, it can cause harm – especially when pursued fanatically. In this blog I look at latest Government figures and ask whether pension schemes are losing weight in the right way. I conclude that we are starving ourselves of growth, for the wrong reasons – we must restore confidence in pensions as a store of productive capital.
The Office of National Statistics published a picture of the changing weights of our funded occupational pension schemes in the size months leading up to 30th September (coincidentally the height of the LDI crisis).
The headline chart shows how private sector schemes (both DB and DC lost weight in terms of assets and in particular in terms of their weight in bonds and shares.
The public sector, saw its equity holdings shrink as markets fell, but its bond holdings remained the same. The private sector saw a steep decline in both equities and bonds suggesting a big sell-off. This will be newsworthy because it talks to LDI
But there is another story being told here.
Toby Nangle has plotted ONS numbers going back to autumn 2019 into two charts that show how funded public sector schemes (LGPS + a few outliers like the parliamentary scheme) are now owning and directing more money into growth assets than their private sector equivalent
This tells us that though the private sector DB plans can claim to be more solvent (on their accounting basis) and DC schemes can claim to have wider coverage (due to auto-enrolment), their combined investment in growth stocks has fallen by £110bn and that a massive £170bn of equities have been sold off since the autumn of 2019. The steepest decline and sell-off of equity assets was in 2022. Meanwhile, the public sector continued to pump money into shares and saw a £50bn increase in equity weight over the period.
The decline in investment through the UK and world private and public equity markets from the private sector coincides with the years of the Sunak/Johnson administration where private pension funds were called for an investment big bang. The big bang was supposed to see pensions invest more in growth stocks – primarily equities. The public sector listened, the private sector did the opposite. Why?
Was it LDI wot dunnit?
Well in part.
Jo Cumbo’s tweets tell only half the story
The market value of the UK’s 5200 DB pension schemes fell by 12 per cent in the three months to the end of September last year, or a fall of £173bn from £1.45 trillion to £1.28 trillion according to the Office for National Statistics.
— Josephine Cumbo (@JosephineCumbo) March 23, 2023
The damage to DB schemes has been exclusive to the private sector, DC schemes and public sector schemes actually saw their asset base remain stable.
“the market value of private sector defined benefit and hybrid (DBH) pension schemes fell by 12% between 30 June 2022 and 30 September 2022, from £1.45 trillion to £1.28 trillion; the combined market value of private sector defined contribution (DC) and public sector DBH pension schemes decreased by 1%.”
It looks like most of that 12% fall was from “rebalancing” . Rebalancing came from bond sales, because there weren’t enough equities left.
LDI does not account for the consistent fall in equity weights in the private sector, nor does DC, the fall in equity weights appears to be almost entirely down to private sector DB schemes selling out of growth and “de-risking”.
DB – a lost cause?
Toby’s and the ONS charts suggest that the outflows from equities from private sector DB has been consistent throughout the period since 2019. It is in stark contrast to what’s happened in the public sector.
The public sector has not de-risked and has seen its equity holdings increase, largely because of investment in equities in 2021.
At the Work and Pensions Committee meeting this week, Andrew Griffiths, economic secretary to the Treasury, more or less accepted defeat in getting DB schemes to invest in productive capital. He may have been given an advanced look at the ONS numbers.
There will be many who will see the desertion from equities by DB schemes over the past 20 years as inevitable and the decline since 2019 as “not news”. The impact of holding such low levels of equities is that schemes are now in thrall to LDI which is becoming ever more expensive as collateral buffers increase from below 1% to 3-4%. Griffiths is right to see DB as largely a lost cause. But he can look to his public sector DB schemes, that did not de-risk and did not invest in LDI for a counter-factual. The reason the private sector had to desert equities was mainly due to accounting and zealous regulation of scheme funding based on a mark to market approach. He may look back and see that these killed his golden goose.
DC – the new golden goose
Private sector DB may be a lost cause, but Andrew Griffiths was keen to point out that DC is the new golden goose, capable of laying eggs that crack open productive capital.
Ge may not realise it, but DC is being managed as if it were a private sector DB scheme. Here is a chart of BlackRock’s principal DC default – it’s in many workplace pensions.
A token allocation to diversification (that slither in the middle) and de-risking from 30 years away from “retirement”. The endpoint sees DC only invested 40% in equities with a tiny exposure to commodities and the rest in bonds.
This is “DB endgame” thinking, based on the historic belief that a pension in payment should be invested primarily in Government and corporate bonds.
As Laura Trott pointed out at the WPC meeting, LDI thinking is in DC as well as DB and it has harmed DC savers who are close to the end of their working lives.
We have to re-think what we mean by “de-risking in pensions , if DC is not to suffer the fate of private sector DB. We cannot leave DC savers looking gaunt from a lack of growth, we need to restore confidence in pensions.