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.