I doubt that any conversation surrounding TPR and FCA’s guidance on managing LDI will not reference stable doors, horses, creaking hinges or boults. Being wise after the event is something we are all very good at, being wise before the event is clearly not in our collective skillset.
We might ask how many stables, how many doors? The opportunities lost to occupational schemes to put their stables in order suggest we may need Heracles to clear them out.
As Steve Hodder tells the Financial Times, the measures the FCA and TPR want LDI managers and trustees to put in place are already in place. If it’s just formalizing established practice then one has to wonder how good that practice is for defined benefit occupational schemes.
Would anyone have invested into leveraged LDI with the proposed buffers? Con Keating points out that
The problem with buffers is that they need to be replenished. This is no different from the situation we had previously; it was the need to sell gilts which tripped the declines in markets. Now schemes will be selling the assets they are holding in buffers. During the crisis schemes in fact sold a lot of non-gilt assets – actually far more than gilts.
So the measures are merely away of delaying the same problem
The only difference is that where after one day of collateral calls schemes were “selling everything” now that will be 3/4/5 days
If we are to have funds that pay pensions, then those funds need to be investing to capture future growth rather than scanning the horizon for the next spike in interest rates. If our ambition is limited to docking with an insurance company to unload liabilities and assets for them to pay pensions, then we need to be focusing on ensuring a safe passage to the berth.
Either way, it is hard to see the point of leveraged LDI in a new world where inflation and interest are normal again. I worry that LDI remains because it is all many consultants and professional trustees have ever known. LDI is habitual.
It is hard to wean yourself off an addiction but that is what trustees and their advisers must do. They must do their cold turkey and reinvent strategies,
There is no going back to the world that pre-dated the LDI crash, a fundamental re-think is required, leveraged LDI is a busted flush.