In her preface to the 58 page response given by TPR to parliament’s work and pensions committee, CEO Nausicaa Delfas says that the £425bn loss. a 24% value destruction , was an “evolution”. The “LDI episode” is credited as the result of the loss.
I suspect she is mistaken on three counts. Firstly, the lengthily explained methodology employed by the PPF and TPR to get to the £425bn number is flawed and should be closer to the £600bn number calculated by Keating and Clacher and estimated by the ONS, secondly, the LDI episode was not an “evolution” but a man-made crisis created by a deliberate attempt to disrupt the natural course of pension evolution through leveraged LDI (aka “de-risking”). The third mistake is to think of the “episode”, the days following Liz Truss’ mini-budget as the cause of the problem, as TPR’s figures show, the loss was at its fastest in late September but has been going on throughout 2022. The LDI episode was only the coup de grace.
For those who want to read this overdue report, it is republished below and can be dowloaded from here
2022 was a year when pension schemes moved from a notional deficit to a notional service. The CEO’s commentary observes that schemes that hadn’t hedged all their interest rate risk had profited most from the hikes in interest rates throughout 2022
Our modelling confirms that those schemes which were “on-risk”, i.e. those with higher levels of growth assets and lower levels of hedging, observed the greatest improvements over 2022. This is because these schemes have benefited from the
significant fall in the value of liabilities linked to higher gilt yields whilst their asset values remained resilient.
This observation is sufficiently high level to have been made by just about everyone since October 2022 and is generally accompanied by the observation that “despite de-risking”, pension schemes were better off – £575 or 33% better off as a result of a fall in the valuation of liabilities.
It is important to note, that it was the valuation of the liabilities that fell, not the liabilities themselves. Pension schemes still “owe” pensioners payments of the same amount as they ever did, what has changed is the discount rate that valued the liabilities. By contrast , the value of the assets is very real and to the extent that there is no longer the money for growth or even to hedge- non-recoverable. However we are still not in a position to know how much lasting damage the LDI episode created
Due to restrictions in the data that we collect, we are unable to provide the analysis and results disaggregated at the level requested in respect of pooled leveraged LDI, segregated
or bespoke LDI arrangements.
The cause of the 2022 $325 bn loss is much simpler to explain than the 58 page report makes out. Most DB pension schemes were invested primarily in gilts in 2022. These are the gilt returns.
Evan Guppy, the head of LDI at the PPF admitted last year that the steep losses experienced from not just holding, but borrowing to hold more gilts, was not a good thing to do in 2022 and that he wished the PPF hadn’t done so.
That’s because any alternative investment strategy would have worked out better over the period
If the chart isn’t clear, the thick light green line at the very bottom is the return on index linked gilts and the purple line just above it, the return on 15 year gilts
What happened in the LDI episode, was entirely avoidable if pension schemes did not have to sell their assets at the bottom of the market. But the fundamentals of leveraged LDI meant that that was exactly what they had to do, in order to repay borrowings that came due under the terms of contracts for difference entered into with the banks who lent the money,
To suppose that this was the part of the evolution of pension schemes is to mistake an artificial construct (leveraged LDI) for the long-term investment of assets to meet long term liabilities (the payment of pensions).
To suppose that what happened in the LDI episode was the problem, is to ignore the losses that had been going on throughout 2022 , which Guppy and others now admit were avoidable and regrettable.
To suppose that the number arrived at as “the loss” is £425bn would be wrong of both TPR and the industry is the final number. As Iain Clacher told the FT
“As TPR have acknowledged that they won’t know the full extent of this until scheme returns come in, this suggests that this number is likely to be higher once everything is known.”
Everything will eventually be known. I suspect that as TPR get historic numbers from the triennial review cycle, the gap between its current estimate and that of the ONS will narrow- towards the ONS number. So as we put distance between today and 2022 , the restatements will become less relevant and more easy to explain away.
I fear that in using words such as “evolve” and “episode”, the Pension Regulator is creating a false narrative for itself. To pint the tail of the donkey on the LDI episode, is to miss the systemic problems with leveraged LDI and to argue against the ONS is a third mistake.
Nobody wants TPR to be harmed by the WPC’s investigation, we want TPR to learn from the harsh lesson of 2022. But I fear that the lessons of 2022 have yet to be learned and this report does little to make me think differently.
When will this industry deal with the issues just look at the results of decades of failure https://www.theguardian.com/money/2024/feb/08/britons-cant-afford-to-retire-insufficient-pension-pots?CMP=Share_iOSApp_Other
Henry makes a number of extremely good points. I would like to add the following:
It is interesting to note that in the covering note, there appears to be some migration of TPR’s ambition: “TPR’s key priorities as a regulator are to protect savers’ money by making sure trustees and employers comply with their duties; enhance the system through effective market oversight, influencing better practice; and to support innovation in savers’ interests.”
The cover note highlights the following findings of the Report:
“Our modelling shows aggregate funding levels of DB schemes improved over 2022 on a variety of measures:
• Funding levels improved for 87% of schemes on the statutory ‘technical provisions’ (TP) basis.
• Only 5% of DB schemes experienced both a deterioration in their funding level and either an increase in their existing funding deficit, or a movement from surplus to deficit, over 2022.
• By the end of 2022 our analysis suggests that broadly 80% of schemes were in surplus on a TP basis and on a buyout basis.
• About 4 in 10 schemes are estimated to be fully funded as at the end of December 2022 compared to less than 10% at the end of December 2021.”
It is deeply disconcerting to find at the overarching summary level such an obvious inconsistency – final two bullets above. If 80% of schemes are in surplus on both TP and Buy-out bases (estimated to be 15% – 20% above TP), then only about 5% of schemes would be in deficit of a TP basis alone. This is completely inconsistent with 40% (4 in 10) being fully funded. These figures are also inconsistent with the figures reported by the PPF on a s179 basis. In December 2021, PPF reports 2,156 schemes (41.3%) in deficit and 3063 in surplus. In December, the PPF reports 686 (13.4%) in deficit and 4,445 in surplus.
Iain and I have been asked to produce a full analysis of the Report – we will make it available here when (though given the length of the Report, it may have to be published in part-work form)
That will be great Con, much needed and eagerly awaited.
It will of course be completely lost on the TPR that most informed commentators have immediately discounted what they say, waiting and needing some independent analysis that you and others will provide, and they continue displaying the exact protectionist deny-all reactions (as for example deployed so poorly by the Post Office on Horizon) with no-one apparently displaying the hubris or morale compass to comment in an unbiased way.
Thanks Con, I look forward to your full analysis which may well need to be posted in stages.
The objective facts are that the nation’s store of wealth, intended to support the economy into producing the returns required to pay a modest inflation-adjusting income to our non-working elderly, has diminished by circa half-a-trillion pounds (£500,000,000,000 !!! – that’s an awful lot of zeros and future taxes!) – that is a staggering loss in value in any terms, but the impact on the nation’s ability to fund an inflation adjusting pension is so much worse when compared against the cost of living impacted by global inflation factors.
Let’s be clear that is an absolutely catastrophic and totally avoidable loss in value inflicted upon the people of this nation from the supervision and coercion of a Regulator operating without Ministerial control or oversight and left to define and adjust its own brief.
TPR still try to obfuscate this by limited their narrative to the individual scheme level, when they should be considering the whole system basis, and by that I mean the pension system as an integrated part of a productive economy. If you “de-risk” an economy on such a whole system basis – as they coerced schemes over the last 2 decades – its should be of no surprise to end up with such low productivity and truly enormous levels of borrowing.
A wise former MNT, am experienced union rep (in trying to cut through all of the consultant jargon and mis-direction), once summarised for fellow Trustees that the operating of pension scheme was like charting an ocean-liner on a very long journey, often through choppy and uncertain waters, making small changes in direction, relying on its own sense of resilience and guided by a clear destination in mind.
TPR – with no real experience of ever having been on such a liner – saw LDI as the lifeboat into which it arbitrarily threw schemes, off of their safe liners – in most cases without even considering if they even needed to be ‘rescued’: the result has been that so many schemes ended up totally unnecessarily on the same inflexible lifeboat, and that unguided (without data or oversight) it was not able to react to events, so becoming the enormous deadweight anchor jeopardising and dragging down the very economic liner we all need to pay the pensions, and provide for our public services.
We need less, clearer regulation on pension investments. TPR needs to have the courage to accept it doesn’t really understand ‘investment’, and to step back a good bit from its current one-size fits all interventionist mindset, and instead provide more support to schemes to chart their own courses.
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