The Financial Policy Committee’s recommendation is that the Pensions Regulator is re-equipped with another statutory objective, to become pension’s agent for the Bank’s work on financial stability.
For departing CEO, Charles Counsell, this means a handover to incoming CEO Nausicaa Delfas of uncompleted business. The handover is being dressed up as continuity, but it looks like a radical change in the structure of UK pension regulation could soon follow.
Here is the official line.
“TPR, the FCA and Bank of England all have a role to play in monitoring risks, and we will continue to work closely with them going forward. Our new guidance on LDI in April will update our recommendations for how schemes manage LDI investment going forward.“
— Josephine Cumbo (@JosephineCumbo) March 29, 2023
No doubt those who continue to advise on LDI will point out that the move to require a minimum 250bp buffer to support future collateral claims is no more than formalizing the emergency measures that have been in place since the LDI crisis. The recommendations to improve the liquidity waterfalls that clearly failed in some LDI arrangements also falls on TPR.
Trustees will have to consider the viability of keeping leveraged LDI in place. The 250 bps buffer is in excess of the normal liquidity needed to manage day to day matters
But it is the annexation of TPR to effectively report to the Bank of England which is the most intriguing and radical of the proposals in the Bank’s quarterly financial policy update.
TPR may well wonder where the appropriate capacity and capability will come from.
What is left of TPR’s independence?
Nausicaa Delfas has spent her career at the Financial Conduct Authority which reports to the Treasury not the DWP. The head of policy , David Fairs, has recently left TPR and now works in consultancy. The two most publicly identifiable chiefs are gone and there is little left of a Pensions Regulator , operating as a counter weight to Treasury and Bank of England pressure.
The failure of TPR to foresee the consequences of a sharp rise in gilt yields looks to have so spooked the Bank of England that it is looking to take over a key part of TPR’s role, the policing of the financial stability of our DB pension schemes.
Rightly, the FT questions whether the funding code that the Pensions Regulator was looking to rush through in 2023, will survive. With the DWP showing no sign of producing the regulations that it has been consulting on, the Code looks sponsor-less.
The DWP – to whom the Pension Regulator currently reports , is playing its cards close to its chest on this. It has other battles to fight, most immediately it has promised to announce the results of its review of the state pension age, which it is widely thought should increase in line with the current time time table , not the accelerated time-table recently proposed. The BBC is reporting this morning
“The work and pensions secretary is expected to tell MPs on Thursday that now is not the time to make the change, and any decision will be pushed back till after the next general election.
Pension’s political agenda is shifting fast. The DWP’s priority is to support getting those out of the workforce and over 50 back to work. It is not about creating political problems for itself by crossing swords with the Bank of England or the Treasury.
The DB funding code , like the bringing forward of the state pension age are policies that were born in the early days of this Government when it was thought that unpopular measures could be pushed through on the back of a strong Government and a stable economy. The impact of the pandemic and of subsequent instability in the primary and secondary banking system, mean the opportunity for radical measures has been lost.
Those commentators like me, Con Keating and Iain Clacher who have been calling for a different way of considering risk in pensions, see some light at the end of tunnel for DB pension schemes still able to make their own way. Sadly, the majority of pension schemes are in fit state to pay pensions over time and will feel the need to pack in the payment of pensions , handing assets and liabilities to insurers.
There is a just transition for schemes to follow , to ensure that the interests of members are put first. That just transition is probably of more importance to those in defined benefit pension schemes than continuing with the doctrinaire provisions of a DB funding Code. The future of the DB funding code looks as much in doubt as the independence of the Pensions Regulator.
I suspect that the Bank of England Financial Policy Committee recognised that the interest rate risk in DB pensions is not a natural risk but rather the creation of LDI investment strategies, and as such it is the behaviour of the schemes which adopted it which must be regulated, that is changed. It is interesting that the 250 basis points (minimum) they recommend as buffers are very similar in magnitude to the 30% regulatory capital requirements of insurance solvency regimes but differ in that these will need to be held as cash. That magnifies their cost greatly. They will serve to limit leverage if they are enforced, but the laws on borrowing are not being enforced so there is some doubt there.
If TPR and the DWP persist in trying to bring forward the Funding Regs and Code now, it will be an act of utter folly on their part.
With great power comes great responsibility. TPR had independence aplenty, and it was unclear who if anyone they were accountable to or for. Anyone who has witnessed TPR and DWP will have seen DWP were/are enthralled by the “experts” rolled out by TPR and any narrative from DWP is indistinguishable from the soundings of TPR. “Experts” who it seems with a great uniformity thinking, borne of the consultancy backgrounds to which they return.
TPR’s influence, unchecked, has ran amok through the prospects of the once thriving UK DB pension landscape this last 2 decades, unseated a standing prime minister and chancellor and without critical intervention would have crashed the gilt market for Govt, and overseen the destruction of value with a now accepted (previously denied – Mr Fairs “its a timing thing”) loss of £500bn on the nations DB assets.
It still has directional influence over the investment of £2trn (formerly nearer £3trn, ’till we lost c£500bn) DB scheme assets (and thank goodness they not been able to sully the independence of the LGPS regime), with more firepower to influence the macroeconomic direction than all Govt depts other than Treasury.
The scale and influence of pensions, especially the enormous pools of DB assets is too significant for TPR to be left to its own devices, and TPR and pensions needs more heavyweight oversight from Treasury/Govt and a broader remit, recognising that only an invested healthy growing economy can afford to provide its age retired with a living wage.
For so long, there has been one point of view, TPR’s, into which the consultants have been buying heavily. For long-term financial entities, such as DB pension schemes, the concentration upon assessing the correct discount rate (spoiler, it doesn’t exist) producing a single number has been fatuous. Can we be grown-up, please?
Jon, spot on!
It’s time to ditch the discount process and replace it with a funding system based on cashflow management. We need to build a framework that recognises the stability provided by long term predictable income streams and not the volatility resulting from short term changes in the market value of assets.
The UK gilt market has been in an asset bubble, supported by DB pension funds and the Bank of England, for more than a decade. The Government (along with The Pensions Regulator) have been in denial over the impact that the loss of the UK’s ‘AAA’ credit rating has had on global bond investors – there are now more than 20 countries with a higher rating than the UK!