Anyone who is familiar with the Consumer Duty knows the phrase “avoiding foreseeable harm” but trustees and funders of occupational schemes may not. That’s because the Consumer Duty doesn’t extend as far as occupational schemes. Perhaps it should.

If you are in your final years of work and in a workplace pension, you are probably comforted to know that your trustees or insurer are “de-risking” your pot, protecting it from nasty surprises like this

or put another way – this.

Why should the 10 year gilt yield worry you? Well because the price of gilts is the inverse of the yield they give meaning that the values of the gilts that you “de-risked” into , may just have plummeted,

With the 10 year gilt at 4.26% and the 30 year gilt rate at 4.55%, the values of gilts are almost as low as during the mini-budget crisis.

The good news is that the price of annuities will be almost as low too – but if you are not off to purchase an annuity in the next couple of hours, then that doesn’t help much.

What is more – general estimates for the 30 year gilt suggest that it will trade with a yield of nearly 5% in a year’s time. If that means further falls in the value of gilts, why are DC managers keeping them as part of a de-risking strategy. Why aren’t they avoiding foreseeable harm?

The Grand old Duke of York

The Grand old Duke of York was known for marching men up and down hills for no purpose. All that the troops knew was there position on the hill, not whether they were doing much good and that seems a just analogy for the practice of investing in gilts.

That your position relative to the hill might mean that you are hedged against someone else’s position is irrelevant unless you want to meet only when you are half the way up the hill – at which time neither of you are taking much risk of slipping up or down.

Last night I went to a PMI London meeting where an assembly of generals were to be seen at the top table , explaining to the troops in the audience why it remained sensible to retain and top-up hedges on the LDI protection for  their defined benefit schemes , even though the cost of doing so has increased as margin buffers have increased from 1% to 4% of the amount borrowed.

I had two questions, one of which to ask why the troops continued to follow orders – even when they could be doing something more productive. The second question was why it turns out that many of the troops (trustees) thought they’d kept their hedging in place only to be told – five months after the event – that it had been blown away at the time of the mini-budget.

The definition of insanity

The Grand Old Duke of York’s men must have gone nuts repeating the same old march time after time and so must trustees and so must the DC savers invested in gilt funds as part of lifestyle de-risking!

We’re nearly back to where we were in the mini-budget crisis. DC savers are taking yet more pain and DB trustees are hoping that while liabilities are down – so is the fund that backs them. No-one knows if he actually said it , but Einstein comes to mind.

Do pension schemes really need to borrow money to stay on the right side of the Regulator? I’m not so sure they do and not sure the current Regulator wants them to.

Hedging isn’t so expensive when interest rates are up towards 5% and maybe a few schemes will start following a slightly more positive approach as the prospect of “long inflation” takes hold.

One way or another – it would good to see schemes considering a slightly longer life than under the strictures of the DB funding code.

The presence at the PMI meeting of at least one hedge fund manager, suggests to me that there are plenty of investors keen to take advantage of forced buyers and sellers.

So maybe those trustees who have followed the mantra of the “fast-track” will reconsider.

Independent thinking and challenging received wisdom seemed to be a virtue to TPR’s new CEO in her speech earlier this week.

So what of the DC saver?

The cost of de-risking going wrong in DB is born by the sponsoring employer. The cost of de-risking going wrong in DC is born by the saver. Savers who have been force fed a diet of corporate bonds and Government debt to protect their pots from the volatility of equities are now considerable worse off, and whatever recovery happened in gilt prices after October has now been given back.

The consequences of people in DC schemes remaining in gilts look set to continue with inflation likely not just to exceed the 2% target of the BOE but the 5% year end target , set by the Prime Minister. Many gilt experts expect gilts to remain yielding 4.5-5% for a time to come. The prospect of more people de-risking into gilts is not likely but inevitable.

But this is  “foreseeable harm” and the Consumer Duty is clear. When it is evident, it must be avoided. Whether you listen to the FCA or TPR, it is time that DC trustees and funders worked out what the purpose of their pre-retirement strategies are, and reassessed them in the light of what their savers are actually doing.

As with so much else, the answers are in the saver’s data.