Yes, I know that Pension Scheme liabilities are projected to be lower by more than £626,000,000,000, but you can’t eat projections.
The money that was lost by UK DB pensions last year is gone. It has been collected by those on the other side of the derivative contracts that underpinned LDI , it is lost to pension schemes whose gilt portfolios are today worth a fraction of what they were in late 2021.
As Nigel Wilson , L&G CEO told the Lords Regulatory Committee, what matters to insurers when they buy-out pensions is the money they can make on the assets, the smaller the asset base , the less the deal. Though insurers look like they’ll get to eat most of the pie, the pie is a lot smaller and less digestible than it was.
And as for schemes that have lost their hedges, they are left with serious problems when the high interest rate tide recedes.
Yes, most pension schemes hold assets that match the actuarial valuation of the liabilities they have taken on, but the nominal liabilities are the same. At some point people will wake up to the simple advice given by Edi Truell to the market 7 years ago.
LGPS pension funds did listen and they invested in real assets, we should be grateful that they did.
The irony is that the “liquidity” of gilts turned out to be a mirage. There was no liquidity when the LDI market crashed, debts had to be repaid – often by selling gilts at exactly the wrong time. Liquidity had to be pumped into the market by the Bank of England for those gilts to be sold.
People know the value of money and though it’s hard to envision what £626,000,000,000 actually looks like, it is possible. Think 626,000 of these.
One Million Pounds Sterling
The argument is that were interest rates to fall, the value of the gilts held because pension schemes held on to their hedges, would rise. But that £626 bn is not going to resurface like a block of ice held below the waterline. That money has melted away into the global financial system and is lost to pension schemes forever.
And that is because it only ever represented an abstract notion- the value of Government debt. It was not invested in the sources of the wealth of this nation or any other nation but in financial instruments of dubious value.
Patrick Tooher is right. We put the value of something at what it can do for us, the utility it brings. The utility of £626 bn lost to pensions is very real, it is enough money to restore the standard of living for many of us, which we have lost over the cost of living crisis. That would bring current and lasting happiness to millions of people in Britain.
But financial economists say that losing that real value from pensions was worth it, simply to say that pension schemes are currently notionally in surplus. Those of us with DC plans that similarly de-risked, know that the value of our plans, like the DB plans we read about, has fallen -by as much as a third. That is real money and it’s not coming back just because interest rates fall (either).
We should have listened to Edi Truell in 2016 and we should listen to him today. Successful funding of pensions is based on investments into long-term assets, not promissory notes issued by Government.