As we prepare to make the trip to Edinburgh to the PLSA investment conference, I thought it would be opportune to see how pension funds are reacting to the Mansion House statements made by the Chancellor last June. I say “statements” as nothing that the Chancellor said in his Mansion House Speech has become law, what he called for was for consensual change from pension funds while sticking to three golden rules. This blog asks, “has he got change” and “are pension funds sticking to the golden rules”. From what I can see, the answer is “no and no”.
The first of three “golden rules” he set out in his Mansion House speech aims to respect how London is “the most international of financial centres”. Since the speech a number of high profile UK companies have listed abroad and some, like TUI , have announced that they are de-listing in the UK and re-listing elsewhere. The London Stock Exchange is suffering from a crisis of confidence with the FTSE 100 showing a negative return for the year while its American equivalent is up a quarter. The FTSE 250 , where most private investments sit, is beset by discounts, to a degree created by a dodgy disclosure regime which is driving money away from investment companies, that are the indices’ staple. Smaller companies aren’t listing on AIM , claiming that they can get better valuations elsewhere – making it easier to raise via an initial public offering. So far so bad. There is precious little evidence of pension funds doing anything to turn this chronic problem round.
A second “golden rule” was a statement that the reforms should be in the interests of savers to ensure they get the best returns, a vow intended to allay concerns in the City that the Chancellor might try to raid the country’s pensions and force them to invest in riskier assets.
The “best returns” from a DB pension scheme must be measured in the pension and cash being distributed from the pension. What UK corporate pensions have done since June is to run for the door, embracing the “endgame” as they embraced “LDI” as a means to de-risk the corporate balance sheet. In doing so , they have abandoned not just the opportunity of future accrual but the possibility of discretionary payments to savers. The only advantage to pensioners of the “rush to buy-out”, is in avoiding the PPF. If that was the intention of the Mansion House speech, it was certainly not the one spelt out by the Chancellor. The Chancellor pointed towards pension scheme paying more, the industry heard “pay less”.
Meanwhile, news of DC pensions investing in productive finance has all but dried up. Beset by issues relating to commercial pricing, most commercial DC schemes have pulled up the drawbridge on productive long term investment and hunkered down into now-traditional strategies investing into public assets through index-hugging. So far so bad for the Chancellor.
The third golden rule set by the Chancellor is a recognition that he still needs Britain’s defined benefit pension schemes, to carry on funding government borrowing. In this area, Hunt said there will be “no dramatic change”. Worryingly for the funding of our national debt, our defined benefit schemes are switching to funding corporate rather than Government debt.
Pension fund demand drives revival in UK corporate bond market https://t.co/IMRpywZjci via @ft @marymcdougall13 @iankmsmith
— Josephine Cumbo (@JosephineCumbo) February 20, 2024
The FT reports this morning that
“the UK’s £1.4tn “defined benefit” pensions industry has been switching to corporate debt for its higher yields and to prepare the schemes for potential sales to insurers”
This is not productive long-term finance, these are repayable loans not investments in a company’s equity. These loans are tradeable on bond markets , they are not designed to grow the British economy, debt is an albatross around a company’s neck which drives companies to contract , returning capital to shareholders though buy-backs and manage its operations to meet the demands of those to whom they owe money.
As Ezra Pound pointed out
with usura..no picture is made to endure nor to live withbut it is made to sell and sell quickly
And what is being sold to buy corporate debt? The answer is Government Gilts. the support of our national debt.
There is dramatic change in our pension industry but it is precisely the change that the Chancellor didn’t want
In June last year, Jeremy Hunt told us
“Those who invest in our gilts are helping to fund vital public services and support for households facing high energy bills, Any changes must recognise the vital role they play.”
Today we read that
During the market chaos that followed former prime minister Liz Truss’s “mini” budget, many schemes using so-called liability-driven investment — a strategy that uses leverage to manage funds’ exposure to swings in interest rates — were forced to dump their gilt holdings to meet cash calls from lenders.
Now, many funds prefer to buy corporate debt, which offers protection from interest rate moves without taking on leverage, as well as higher yields than government bonds. Colm Rainey, co-head of European corporate debt capital markets at Citigroup, said he thought a rise in demand from pension schemes “could be quite significant in terms of the direction of travel” for sterling corporate debt issuance.
We can also read that the “direction of travel” is not only away from Government debt but away from the British economy
The share of European corporate bond sales denominated in sterling has risen to 8.4 per cent from 6.8 per cent at the beginning of 2023, the busiest start to the year in a decade for investment-grade issuance from non-financial companies.
The demand has helped push a number of continental European companies to issue sterling debt for the first time in recent months, including German real estate company Vonovia, German truck manufacturer Traton and French luxury goods group Kering.
What are we doing?
As our investment gurus prepare to take planes , trains and automobiles to Edinburgh , they might ask themselves these questions
- Where is the evidence we are meeting the Mansion House Compact and investing £50bn more of DC savings into productive investment?
- What is going on to improve the VFM of our workplace pension saving?
- How is the “pension endgame” improving member outcomes?
- How is disinvesting from gilts and investing in UK and overseas bonds helping?
This reading of the behaviour of the pension community suggests it is putting two fingers up to the Chancellor, the Shadow Chancellor (Rachel Reeves pursues the same agenda) and to the members of occupational DC and DB plans.
The short-term interests of trustees and employers to “de-risk” their livelihoods and their balance sheets is being put before the long- term interest of the country and of pension savers and pensioners.
Having disgraced ourselves in herding behind LDI, we are doing the same again. The rush to buy-out is against the long-term interests of everyone apart from the shareholders of insurers and the markets they invest into. It is fundamentally opposed to the changes advocated by the Chancellor last June and I fear we will look back at 2023 and 2024 when pension schemes had their chance and blew it.
When I first joined a company pension in 1995, Frank Field was calling British pensions “our economic miracle“; 30 years later, they are making us a laughing stock.
If you go back further to 1973 when I first entered the pensions advice
business competition for offering a DB scheme was on the basis of the contribution rate illustrated for a known promised outcome.
This seemed absurd then as do some of the politically motivated “nudges” on the
the current agenda.
It seems that two dimensional representation limits the thinking plus a few sacred cows such as “gold plated” presumption and DB transfer advice is bad.
Before I retired we had situations where a TV was 40x the promised benefits 5 years ahead. Not to transfer might be argued to be bad advice.
If I had not advised transfer would that have been resulted in compensation being due?
In one case where the transfer did take place the commencement lump sum bought two apartments and the rent exceeded the promised benefits and started 5 years earlier than the promised DB pension. In the period the rents have increased greater than RPI. Incidentally the apartments were bought by the spouse who had no other income. The member was a higher rate tax payer.
Advice is best when appropriate on an individual level.
The Schemes are not making “investment” decisions. Rather they are seeking to be regulatory compliant. To that extent the Regulation is unduly influencing the fair mv. This is what happened to gilts (with the resulting bubble burst on Sept/Oct 2022.) We are seeing the same in corporate bonds now – schemes are buying as part of a Regulatory induced buy-in flight path, not on fundamentals. This too will end in tears.
This all stems from regulatory interference in the market. I find it truly conceited for a regulator to be effectively mandating investment strategy – I do not think they are qualified to do so. Who is!?
Lastly – it doesn’t matter whether schemes invest in corporate equity or debt; it’s d as all productive capital, as opposed to gilt funding, which is (as the Chancellor had acknowledged) supporting public services. Trustees should be “investing” with a view to realising returns and cashflow to pay members’ benefits.
None of this can change until the Treasury gets a hold of DWP and the funding regs.