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.
