One politician I will miss in power from July is the Treasury’s Bim Afolami. I doubt he will be missed much by the regulators but he speaks for business and for many people like me, trying to get growth into the economy.
Speaking to the Times , Bim is in good form- weeks away from him losing his Ministerial role and most probably his job.
The next government should take steps to include the promotion of economic growth in the mandate of independent regulators, the City minister has said, after a spat between the Conservatives and the financial watchdog over a “name and shame” proposal for companies.
Bim Afolami, the City minister and economic secretary to the Treasury, said that the next government should seek cross-party support to ensure that “regulators think about economic growth as well as the safety and soundness of the market”.
In case you haven’t been reading this blog for the past five years, the Pensions Regulator has not been a friend to growth, rather it has looked to de-risk pensions by its guidance.
The impact of regulatory interventions in the pension space has been to tie asset strategy to liabilities using a strategy which worked when interest rates were low but went wrong when they went up. The impact of leveraged LDI was that Britain lost £266bn of potentially productive assets to collateral calls from banks. We bet the house on gilts when we could have invested in long-term capital.
Now that interest rates are high, schemes are looking to buy-out with insurers, but this is proving less easy than thought because of capacity constraints and because the schemes that bought into leveraged LDI have had to sell their liquid assets and are left with a rump of productive assets the insurers don’t want.
Rather than reverting to plan A- the idea that DB plans should “run-on” and pay pensions, the Pensions Regulator continues to faff about trying to put in place its DB funding code on the back of DWP legislation that looks remarkably like the stuff that drove schemes to leveraged LDI in the first place.
Meanwhile, any innovation in the DC space is being cautioned against by the Pensions Regulator which went so far as to call out one firm who was suggesting re-opening a DB plan for savers who would rather a pension than a pot.
Bim, you will be missed. You may be an Etonian with a swanky CV and the elegance of a well-heeled banker, but you are saying the right things and you are leaving the right legacy. You were for getting things done and though you got nothing done, that wasn’t your fault. These appear to be your departing words, good luck.
“All regulators are established either by government fiat or by statute. They are not judges nor a state of the realm. They’re ultimately established by parliament and I think it is clear that parliament, not just Conservatives but a lot of the Labour Party, are now saying we have to make sure that our regulators think about economic growth.
“We’ve got to think at all times what [our actions] will do to growth and competitiveness. If the answer is that it’s not going to improve it, we shouldn’t be doing it.”
See you back in the City Bim
The electoral calculus and the new boundaries give Bim a one in six chance of getting back as an MP. His party is currently reckoned to have a one in forty chance of forming the next Government. Bim is not the kind of buy to ignore the numbers. Nor is he the kind of guy who will have much difficulty getting a decent job.
Sensible words from Bim Afolami.
I do wonder how far politicians (from both the currently main parties) are directly blaming The Pensions Regulator for the current state of the economy? I am sure Liz Truss will blame TPR for bringing down her Government.
The problem appears to be that the TPR did not seem to be appreciate that what was a prudent investment policy (at least for risk analysis purposes) became anything but prudent when market conditions fundamentally changed.
Surely trustee boards are acting imprudently if when selecting their investments they selected investments generating a 2.5% annual real investment loss for the duration of the pension scheme’s liabilities! If there were no better investments available at the time, the prudent trustee should surely have sought to protect the capital value of the fund. However the TPR made these imprudent actions as near as mandatory for pension schemes. The consequences are that unnecessary “deficit reduction” contributions have been and continue to be sucked out of employers in the productive economy, the Gilts market is extremely fragile and volatile (do pension schemes measure the Value at Risk of their Gilts holdings?), other investments into the Stock Market and the UK productive economy have all but dried up, and pension schemes are targeting the most expensive way of paying their pension liabilities as they fall due (the insurance company buy-out or buy-in).
As you note, Henry, there is little evidence that the current draft of the DB Funding Code has learned these lessons.. I do doubt any incoming Government will be content to see such a Code put in place.
Very good synopsis of the issue and the bind we find ourselves in when we let Govt / quango direct Trustee (and National) investment policy – that is what “de-risking” was/is! Trustees and their advisers did not act prudently. The problem now is not the crime, but the cover up by the same generation of actuaries and lawyers, in denial, and who’d gleefully took the shilling while shepherding us all over the cliff edge.
The markets always corrects, eventually, and the longer it takes to do so, the more violent the correction and the fallout. And the price has to be paid – the key question concerning those who took us to/over the edge is will they be long enough gone to avoid paying their share of the correction. I doubt it.
Could not agree more with PensionsOldie’s comments above.