Shalin BhagwanShalin Bhagwan• 1st• 1stChief Actuary and Interim Chief Financial
8h • Edited • 8h • Edited •
Is it just me or was it not so long ago that most pension funds (bar the largest) were being encouraged to implement investment strategies to reach full funding, with the ultimate objective being to target buy out of their liabilities with an insurer.
An entire ecosystem told trustees how they would help them reach that “gold standard” of buy-out through the use of fantastic strategies like LDI, private credit and other contractual income strategies.
And then, without any exaggeration,
gilt yields rose overnight and a significant majority of the pension fund universe reached full funding and buy out affordability.What happened next?
Pension funds stayed the course and followed through with their original plan.
Of course not.
Why would we do anything as sensible as following the advice of our professional advisers?
Let’s not leave Vegas just yet but instead let us strive for a bit more. Sponsors – we can give you more money through surplus refunds and members we will help you counter the 5% inflation cap despite our own long term inflation assumption suggesting that inflation will not be consistently above 5% p.a.
What behavioural bias is on display here?
Overconfidence bias?
Curiouser and curiouser.
PS: I’m not against DB running on, my point is a) that we are shifting the goal posts so let’s pause and reflect on the goals that were set and b) also reflect on how, over the last decade and a bit, many yearned for the good old days of higher gilt yields which would have allowed for derisking on better terms so they could close down risk on the corporate balance sheet.
I am shocked to read it. It shakes my confidence in the PPF as a potential consolidator and I wonder whether the PPF has properly considered either the Mansion House reforms or the recent correspondence between TPR and the DWP and HMT.
TPR has owned up to the mistaken direction it has taken and its new CEO is determined to have a new mindset.
It’s time that the PPF came in line rather than peddling yesterday’s solutions to imaginary problems.
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We burned the goalpost in 2004. What Govt / Mansion House is seeking to do, admittedly in small steps, is to re-instate the concept and responsibility of investing by pension schemes, with the hope that there will be a game to play in the future.
Spawned by and populated by insurers and actuaries (and now enforcement lawyers), and so enthralled by the cult of de-risking (to suit insurers), the TPR has done nothing but inflict a huge supply side imbalance leading to a truly catastrophic mis-allocation of capital by UK DB schemes.
That could have been overlooked if the DB Fund values were of no scale, but they are truly enormous pots of wealth and the impact of this TPR induced capital misallocation by DB schemes (which should have served as a national store of wealth) is and will cripple our economic growth and prospects.
I agree with your concerns Henry about the mindset of the Regulators, and certainly any individuals I have met recently from TPR have shown not a moment of regret or hubris, and indeed seem content on doubling down on their interventionist approach, mis-aligned to the cult of gilts. It feels like a – “but computer says” moment when speaking to them – they genuinely cannot comprehend a single thought or even the challenge that they might be wrong.
We know interventionism disrupts, creates bubbles and ultimately destroys the efficient operation of free markets, and capital allocation is no different. Trustees and their advisers should allocate – no “invest” – their capital based on a balanced assessment of long term risk and reward. But most didn’t (not in the UK) – enthralled to the cult, they knew only to keep buying gilts and leveraging up on them even at the idiot pricing of negative premiums.
And it continues. On our TRP induced journeys to insurer Buy-out, schemes are now being encouraged to off-load “illiquid” assets at knock down prices – not because the asset have lost their intrinsic value or ability to pay their members pensions – but because insurers can’t hold such assets. Someone (not pension members) will benefit from the knock down bargains being snapped up.
Vested interests will always play markets, and indeed even seek to create false markets to their advantage, whether that be a Govt’s with its insatiable need to issue gilts or the insurers. The role of the adviser (and in the DB sphere we mean the actuaries) should properly be to assess the risk adjusted long term prospects and potential value of all investments – and simply not to act as agents for the DMO or the insurers as the easier way to make money. Considering the exogenous risks is difficult, but that shouldn’t mean we let actuaries stop considering them all together.