The Pension Institute denies LDI had victims; opinion or research?

I have just been asked to read a report on the LDI crisis that draws the following conclusions

To read this Pension Institute discussion paper “Liability-Driven-Investment-a-Victimless-Disaster“. It is written by Keith Wallace , a lawyer with an impressive CV but not known as a pension practitioner.

This is surprising as the paper is filed on the Pension Institute website as a “practitioner report” and not a “discussion paper” . Herein lies a problem. It is neither research nor the experience of a practitioner. It is a collection of opinions,

If you choose to read it all , I’d advise you start from the final page and then consider whether you can stomach the 25 pages that lead up to it.

The paper serves as an academic exoneration of the pensions industry for the LDI crisis last year and is based on the assumption that the only loss to pension schemes was the £3.5bn profit made by the BOE on its bail-out operation.

The loss to pension schemes is expertly laid out by Katherine Lyons in Professional Pensions “Get me out of this LDI shaped hole

She reports on schemes having to commit more assets to their matching portfolios, resulting in schemes having to take more risk to meet their return targets. That assumes they still have the capacity to reorganise assets

The denominator factor is made even more challenging for some schemes as the reduction in the market value of assets over the LDI crisis and the sell off of a large proportion of the liquid growth assets to support the LDI funds has left some schemes with an overly large proportion of assets in illiquid private market assets.

Which means that some schemes are struggling to find liquidity to pay pensions to members. This does not sound a victimless crisis

Keith Wallace relies heavily on market information provided by XPS and Jagger Associates and will no-doubt be used by some organizations to draw a line under the events of last year.

If any pension schemes involved in the raising of collateral to meet LDI obligations in September and October last year regard this disaster as “victimless”, I have yet to meet them.

The PPF accept that the asset base of the PPF 7800 database of schemes is depleted by at least £400bn, Keating and Clacher assess this to be north of £500bn in 2022 and numerous papers on this have been posted on this blog and elsewhere have attributed the loss of assets , to a large part, to the failure of leveraged LDI.

To give but one example of its distorted logic, take item 12.3 above.

It is generally accepted, even by the Pensions Regulator, that TPR was caught out by the events following the mini-budget. TPR’s “modest response”  to what happens does not signify we can continue as usual, it tells us that regulation of LDI was not fit for purpose and will have to radically change. When we start justifying an action by the failures of the actors , we are in a world of trouble.

We now know that the stress was particularly felt by schemes participating in pooled funds, but the fire sale of assets was not confined to small schemes. There was a wholesale rush to liquidate over the period. The report’s author, Keith Wallace – appears to have been at least one step away from the operational and governance issues. How this could be filed as a “practitioner’s report” is unclear.

The discussion paper’s structure is designed to build a case based on historical evidence that takes us back to 1980 and draws heavily on the author’s legal experience. Half of the paper is taken up with giving us an erudite walk around the background and it is only at page 13 that we get to “what actually happened” in 2022.

What follows is a jumble of opinion and anecdote based largely on conversations with actors who clearly have good reason to present the crisis “their way”. This would be fine in a blog, where prejudice is admitted, but not fine in an academic paper, where we are expecting a presentation of fact.

Which begs the question, what exactly is the Pension Institute and why is it publishing this paper. It is part of Bayes (formerly Cass) Business School and  claims

to be the first and only U.K. academic research centre focused entirely on pensions research.

I wonder how its reputation is enhanced by this discussion  paper and how the paper benefits either the Pension Institute or Bayes Business School. If it is a  report, it needs to be called out and dismissed, it is a poor piece of work. If it is an opinion piece, it is no more than an extended blog with delusions of grandeur.

Either way it is plain “wrong” in its conclusions.  The research that underpins it seems to be little more than tittle-tattle. The report’s  intention is to deny liability for the detriment caused by the LDI through a spurious cloak of academia.

We cannot learn from the LDI crisis – by denying it had no victims. Whether an opinion piece of a practitioner report, this report needs calling out.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to The Pension Institute denies LDI had victims; opinion or research?

  1. John Mather says:

    No one to blame….another benefit of collectives…. They should go into government where the skills would be profitable…but not for the public

  2. jnamdoc says:

    The industry speaks for the industry. Who considers the members and the tax-payers (current and more importantly future). I’m surprised Jagger is associated with this.

    The future tax-payers, the Gen-Z are the big losers. Big losers. And the scale of the cost, both from lost investment and future taxation to be borne by them, will in due course jeopardise the whole system. Of course those who benefit from peddling the current LDI approach, will be paid and long gone.

    Pensions – an age related wage for the economically less able – should be paid from a share of economic output through holdings of a diversified portfolio of assets. And for any nation state (collectively) the more of that income (to pay the pensions) that comes from global equities/bonds, then that leaves less to be funded internally. The more of the internal balance that is invested in enterprise, increases the likelihood of the pensions actually being paid.

    LDI (including the corporatised version of, buy-in) rolled out on a whole system basis is the worst of all worlds, diverting a huge proportion of our nation’s pension asset base into non-productive gilts (the dead hand of the State). Gilts are of course just future taxation, and the scale of issuance is making it increasingly likely that they will not be serviceable from the current or any future tax base.

    A key question we should be asking to assess the damage from the LDI aftermath, is what has been the reduction in the proportion of the nations (DB) asset base that was comprised of equities and growth assets, and in particular the reduction in non-UK Equities.

    We are all agreed that there are the same amount of actual pensions to be paid pre and post the LDI debacle.

    So the real question is, what is the additional proportion of the burden to pay those pensions that now falls upon future tax-payers (to service the gilts that pays the pensions) compared to pre-LDI debacle? And the corollary being how much less of our pensions will be paid by a share in broader (global) output from equities, especially global equities? The difference is the lose we are passing onto GenZ.

  3. Tim Simpson says:

    Hello Henry,
    A question: which view do you think the Government will readily accept? The Pension Institute’s or yours/ John Mather’s/ jnamdoc’s and, presumably Messrs Clacher & Keating’s.
    Why have they done it? You read the Bible: I think it’s called ‘washing your hands’…!

    Kind regards,
    Tm Simpson

    • jnamdoc says:

      Everyone knows what happened and the long term consequences are becoming clear. Do you think at the end Counsell and Fairs didn’t know?

      Govt now fully understands that its lack of ownership on pension funding policy (having been left too long to the TPR and likeminded DWP) has left it in a right pickle. But, even it is hasn’t figured out how to wean itself off of the pension teat, at least it now understands it can’t continually tap pension scheme assets for easy funding. Even the market is seeing the folly of that….

      For its complete lack of balance, this paper makes the Pension Institute look foolish – they douth protest too much.

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