Judging the net zero pledges of workplace pensions

Competition between workplace pension providers has been a great boon to the 11 million new savers who have payroll contributions being made towards a retirement pot.

The vast majority of the retirement pots being built up are likely to see investments lasting over ten years and funding the activities of  public companies, Governments and an increasing number of private enterprises. This money is influential , it can flow to organisations who are enthusiastically embracing the challenge of climate change and it can change the behavior of those that are not.

The extent to which the funders, trustees, boards and IGCs of workplace pensions are serious about reducing the carbon emissions of organisations they invest in, starts with their pledges to make their organisations and their investments “net zero”. That is to say that they are not contributing to an increase in noxious emissions, but ensuring that the amount of carbon they are putting into the atmosphere is cancelled by the amount of carbon they are taking out.

I hope I have this right!  I chaired a session at a conference last week which was supposed to be looking at the corporate culture and the behavior of corporate leaders in making this happen. For a number of reasons my session was a little chaotic and I continue to struggle about how to tell sheep from goats. Who is serious and has a plan which is likely to work, who is green washing?

Despite these net-zero pledges coming in from master trusts and the providers of workplace GPPs,  I don’t see a reliable study of what is happening. I am now looking at the TCFD statements of some of the providers (Scottish Widows and Legal & General have sent me their master trust TCFD statements). I have been looking at them for some time but find myself without the analytical skills to determine what makes sense and what doesn’t. In short I am looking for help as I suspect are more august people than me (like the regulators). It is one thing to make a promise and report on progress but it is another thing to make purchasing decisions based on what is currently in the public domain.

I do not expect to become an expert in this area but there are people and organisations that I am contacting to get help. I’m interested in the work of Minerva and Share Action and keen to follow what Rob Gardner does with the pilot launch of the Rebalance Earth platform.


If you happen not to work for one of these organisations but are doing work in this sphere, I’d be grateful if you could be in touch. ( henry@agewage.com )

It’s a truism that if it doesn’t get measured it doesn’t matter and the employers who choose workplace pensions need a more reliable measure of whether their money will matter than I can find today. I also think it is important for the competition between workplace pension providers that there are no short-cuts and no cheating, it is too easy for “net zero” to become as spurious as some with profits bonus declarations.

In the meantime, I have found some helpful sources that I’m using in trying to make head or tail of these TCFD statements

  1. Standardising net zero – a guide for employers from the Carbon Trust
  2. Measuring biodiversity as a store of value for the future (rebalance.earth)
  3. Science based targets for a net-zero standard
  4. Bloomberg help you chart your companies future towards net zero
  5. Zurich – measuring progress on biodiversity

I am sure I am scratching at the surface, for the more I read, the more I am concerned that Britain’s 1m + employers and  21m workplace savers have no reliable metric to work out if what they are investing in is really making their money work harder towards net zero or relying on unsustainable or even fraudulent strategies.

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Crypto lives outside the regulatory perimeter – just let it burn.

50 cent performing in a Miami nightclub

Apparently the crypto boom has burst for the Miami nightclubs that prospered on the extravagance of crypto nerds who made and paid for their parties in bit coin.

The new partygoers were “95 per cent men, young . . . with a kind of nerdy style,” he said. “You couldn’t tell they had a lot of money if they were just walking around.”

A little more than a year later, the phones have stopped ringing after the collapse of Bahamas-based exchange FTX roiled the market and cast a pall over the industry. The crypto revellers frequenting Miami’s clubs have “completely disappeared”

It’s good to see that the FT can mix it with the rest of them, we all love a tale of hubris , from Dr Faustus to Bankman-Fried , history and the theatre have celebrated “epic fail”.

There will be many articles , books and I expect the odd play devoted to the failure of Crypto and it will be worth remembering that unlike Dr Faustus, who duped a few, there were and are millions of crypto-millionaires right now , wondering if the value of crypto will ever recover to make their new found wealth sustainable.

Certainly we will not mourn the loss of revenue of Miami nightclubs. Though we’ll miss stories of crypto nerds bathing in vintage champagne, there will be another bubble to burst.

This of course is a distraction from the main business. I had a warning yesterday from friend to this blog , Brian Gannon, who is wondering whether my linked in group should be advertising a conference debating the value of investing in Canadian Farmland.

I can think of no investment further from cypto, unless that land is underwater (see GlenGarry GlenRoss). The terrestrial investment become confused with the ethereal because it is “alternative” and this shows how hard it is for us to engage with “private markets”.

For FTX was attracting the institutional investors that manage our workplace pensions

Jon Cunliffe of the Bank of England, speaking to Warwick business school  said the (crypto) industry is not “large enough or interconnected enough with mainstream finance to threaten the stability of the financial system” but its links with traditional finance have been growing rapidly.

Cunliffe argued that it is time that crypto is bought into the regulatory perimeter. Others see this as recognising crypto currency for the opposite that it set out to be. Here the dictum is that crytpo is an outlaw and “to live outside the law you must be honest“.

Writing in his unhedged column, Robert Armstrong quotes Stephen Cecchetti and Kim Schoenholtz….

Just let crypto burn. Actively intervening would convey undeserved legitimacy upon a system that does little to support real economic activity. It also would provide an official seal of approval to a system that currently poses no threat to financial stability . . .

[regulation] will encourage banks both to purchase crypto assets and to lend against them as collateral, making the banking system vulnerable to plunging market values . . . new rules would lead to a migration of financial activity from traditional finance to the still less regulated, but newly sanctioned, crypto world . . .

I agree. Here the questions are “who is buying, what are they buying and where are they buying”. Sadly we cannot stop people from buying nonsense outside the regulatory perimeter – we are not going to regulate let alone shut-down the dark web.

The Elizabethans knew that necromancy was both evil and funny (Kit Marlow’s Dr Faustus is in its midst a bunch of gags). The FT sell copy , asking for spoof concern about Miami nightclubs. I write a blog about crypto as if I bought the stuff or write code. Those who have the perspective to comment are not the people who have been burned.

The alternative regulators to the Bank of England are the Wall Street trading platforms such as Jane Street.Bloomberg says of Jane Street

The more-than 2,000 employee powerhouse based in lower Manhattan is known among peers for its obsession with risk and preference for stealth. It digs into the health of trading partners, models potential catastrophes, autopsies losses and restricts staff from commenting publicly, because even that poses a danger.

Whether it be ETFs or crypto, any form of finance that depends on secondary or shadow banking gets the once, twice and thrice over from Jane Street and since the FTX executive were Jane Street alumni, they were taken seriously. But Jane Street didn’t invest in FTX and retains the reputation that FTX lost – as honest brokers.

Why I side with Robert Armstrong is that unlike Canadian Farmland – which is only too terrestrial, crypto assets have yet to define themselves in terms that most people can understand.

The securities/investment regulatory machinery has been developed to protect a bunch of stuff we have hundreds of years of experience with, and which has proven social value.

The Cecchetti/Schoenholtz insight is that we don’t even know if crypto assets are investment products at all, but if we regulate them that way, that’s what they will become, and as a result investor appetite for crypto risk will grow.

I will never go to a Miami nightclub, nor bathe in champagne. I might invest in crypto-currency as and when I understand what it does and how it helps. But I don’t want to be confused into thinking that all alternative assets are either good or bad because the good regulator loves them all. Everything is not “bright and beautiful” and so long as we have a regulator , I want a regulatory perimeter that leaves crypto outside and ensures that what is bought by people like me, is sold with a consumer duty .

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Covid currently on the wane – unlike excess deaths – C19 Friday report


Friday Report: Issue 73

By: Adele Groyer & John Roberts

Covid-19 Actuaries Response Group – Learn. Share. Educate. Influence.


Covid-19 is still among the most important health topics for scientific papers and articles. The Covid‑19 Actuaries Response Group continues to focus on important Covid-related topics. We produce an update on the last Friday of every month with a summary of key papers, articles and data.


Autumn Booster Progress (link)

The rate of vaccination has now slowed down markedly with just under 14m over-50s boosted. Around 60% of the population. In the last week, just 0.5m were added to the total.

By age, there’s a marked contrast between the oldest age groups, where around 80% have come forward – a very similar percentage to those who came forward for their Spring booster – and the younger age groups. Between ages 50 and 54, just 37% have come forward, with slow progress over the last week, suggesting a total close to 40% is likely to be achieved.

Thus, over 9m people over 50 have not yet had their autumn booster, whether due to apathy, accessibility, or other reasons. With yet another variant becoming dominant (see below), it is clear that many people are not as protected as they could be as we enter the winter period.

Bivalent Vaccine Effectiveness (Pfizer link)  (Moderna link)

There continues to be a flow of studies looking at the effectiveness of recent bivalent boosters in terms of an improved neutralising antibody response.

The Moderna study of its latest vaccine (mRNA 173.222) focuses on efficacy against BA.4/BA.5. Encouragingly it also notes neutralising effects against the emerging BQ.1.1, which is rapidly becoming dominant in the UK superseding BA.5. It does note a five-fold drop in titers when compared with BA.4/BA.5, but still describes the neutralising activity as “robust”.

Meanwhile, Pfizer has released the findings of a study of its latest bivalent booster targeted at BA.4/BA.5. Like Moderna it reports significantly higher increases in neutralising titers when compared with the original monovalent version of BNT162b2. Again, it notes that this effect is also seen in respect of the BQ.1.1 variant, where a 1.8-fold rise in the mean neutralizing titer becomes 8.7 with the bivalent version.


GISAID data is captured by Our World in Data (link) and shows that BA.5 is being replaced as the dominant variant, largely by BQ.1.


Note that countries may use targeted sequencing so the contribution of each variant may not necessarily reflect community prevalence.

If we look at a time series for the UK, we can see that BQ.1 is now the dominant variant. (link)


Risk of newly diagnosed diabetes after COVID-19 (link)

A meta-analysis of nine studies with 40 million participants has estimated the relative risk of diabetes diagnosis after COVID-19 to be 1.62 [1.45–1.80].

This relative risk is similar across all age ranges studied. The risk of diabetes increased to a lesser extent if patients with COVID-19 infection are compared to patients with general upper respiratory tract infections. The risk of diabetes increased with severity of COVID-19 infection.

Studies with follow-up of less than 3 months showed a higher relative risk of diabetes diagnosis among COVID-19 patients which may suggest that the relative risk of a new diabetes diagnosis is higher in the first 3 months after infection.

A separate matched cohort study found that among children aged 18 or younger, SARS-CoV-2 infection was associated with a doubling of the risk of diagnosis of Type 1 diabetes, compared to matched controls who had non-SARS-CoV-2 respiratory infection during the study period. (link)


Long COVID in South Africa… (link)

A pre-print study of Post Covid Conditon (PCC) in South Africa found that around 60% of Covid patients hospitalised during the Beta and Delta waves still experienced ongoing symptoms 6 months after hospital discharge. 18.5% of patients hospitalised during the Omicron wave still had ongoing symptoms after 6 months.

The study also compared risk of ongoing Covid symptoms by the severity of the initial Covid infection and found that the risk increased with severity of the initial infection. Those requiring oxygen or being admitted to ICU were around 2.5x more likely to have ongoing symptoms compared with symptomatic, non-hospitalised Covid patients.

Severity Relative risk of PCC, adjusted for other factors Persistent symptoms n/N (%)
Non-hospitalised asymptomatic Reference 9/162   (5.56)
Non-hospitalised symptomatic 2.32   (1.15 – 4.70) 190/912   (20.83)
Hospitalised (no oxygen) 3.96   (1.90 – 8.24) 105/614   (17.10)
Hospitalised (oxygen therapy) 6.01   (2.94 – 12.29) 335/656   (51.07)
Hospitalised (ventilated or ICU) 5.78   (2.87 – 11.66) 787/1,356   (58.04)


In addition to variant and Covid severity, other risk factors for PCC included older age, female sex, non-black race, the presence of a comorbidity and number of acute COVID-19 symptoms. There was no evidence of an association between PCC and vaccination status.

These results show a higher prevalence of Long Covid that was seen in the COVID in Scotland Study shared in last month’s Friday Report (link). In that study the majority of participants were not hospitalised and 6% had not yet recovered between 6 and 18 months after Covid infection. There are likely to be many differences between the populations in these two studies.

…and in Ireland… (link)

A BBC report from Ireland referencing a report that nearly 90% of those living with Long COVID have yet to return to their previous level of health. (Though it might be noted that, by definition, you would not expect someone classed as living with Long COVID to be at their previous level of health.)

An extensive list of ongoing symptoms is noted, but fatigue is highlighted as the most common. Nearly 40% said their ability to work was limited, with 16% saying that they were currently not able to work and receiving social security payments.

… and Long-term Sickness in the UK

The BBC also reports on the rise of long-term sickness in recent years. Levels were already rising immediately pre-pandemic, have continued to do so since the onset of COVID, but have spiked sharply upwards in recent months.

Long COVID isn’t the only cause of the increase, although it will no doubt be a contributory factor. Though as the graph below shows, many causes are seeing increases. Indirect impacts of the pandemic, such as the sharp increase in waiting lists for elective surgery will also be a driver behind the growth. We discussed the pandemics indirect impacts in an earlier bulletin (link).


We don’t plan on extending Friday Report’s remit to cover flu on a regular basis but the interaction with flu in terms of the pressures on the NHS, and the increased risk to people who have both conditions means that monitoring flu levels is likely to be highly relevant over the winter months.

Flu Prevalence (link)

UKHSA’s weekly surveillance report covers both flu and COVID and has reported an early start to the flu season this year.

If we focus on the yellow highlighted line for 2022/23, we can see how the proportion of positive samples in recent weeks has been well ahead of pre-pandemic years. The chart also shows that in 2020/21 flu season didn’t happen at all, due to social distancing, and there was a relatively mild and late season last year. Therefore, this would appear to be the first winter when the health service has to contend with both a flu surge and COVID simultaneously.

Take-up of the flu vaccine in the 65+ age group is consistent with last year, as it is for pregnant women and for those in clinical risk groups. However, it is lower for the toddler age group.

Universal Flu Vaccine (link)

Finally on the subject of flu, the BBC also reports the current research and development of an mRNA flu vaccine that could be instrumental in protecting populations against a future flu pandemic. It is thought likely that any strain responsible for a pandemic would be resistant to existing flu vaccines, whereas this vaccine, which contains recognisable bits of all 20 known subtypes of types A and B influenza, is considered likely to teach the immune system to fight any pandemic strain.

Combined COVID and Flu Test (link)

The BBC reported this month on the first combined COVID and flu lateral flow test to be approved for use in the UK.

Using a nasal sample, the test returns both results within 10 minutes.

The flu test covers both the A and B types, indicating which is present with an additional positive line.

The company, SureScreen, hopes the product will be taken up by hospitals and care homes.



ONS Infection Study

Since our last report, levels of infection across the UK have broadly halved to between 1.5% and 1.9%. But whilst this week’s update showed further small falls in three of the four nations, there’s a clear sign of levelling off in England, as can be seen from the daily estimates (below right).

Excess Mortality Remains High (link)

We’ve reported in recent months on the levels of high excess mortality seen over the summer. The latest four weeks since our last report continue to show the same trend.

Whilst we generally prefer to use age-standardised mortality, the unusual excess of the last six months is clearly visualised here in a chart (link) which compares death registration counts to recent prepandemic years.

On the age-standardised basis, according to the CMI, the total excess over the last four weeks has been 9%, of which around two-thirds can be attributed to registrations where COVID was mentioned on the death certificate, with continuing debate over the causes of the residual excess.


Hospital Statistics

The recent fall in admissions appears to have run its course, with a levelling off over the last week at a very similar level to the last trough in early September. London, the South East and the Midlands saw an increase in admissions in the last week. With the health system already under huge pressure any increase in hospital admissions can only be unwelcome and detrimental to overall patient care.


And Finally…

Possible Correlation between Chocolate Consumption and Nobel Prizes (link)

Whilst searching for the right words to put in a report, your correspondent often raids the chocolate bar tin in the hope that it will provide some inspiration. Whilst so far the only clear effect of an enhanced cacao diet has been on his waistline, an exciting report in the New England Journal of Medicine discussed in Scientific American links higher chocolate consumptions in countries with more success in achieving Nobel Prizes.

Whilst recognising that this research is no picnic, sadly the review suggests that the methods used and conclusions drawn are rather flakey, and decides to mull it over further following consumption of a Toblerone to boost his cognitive function, an approach your author is all too happy to follow when researching this topic.


25 November 2022


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How linkedin is winning eyeballs

boring but useful – how linked in does its work


Linked in is the least sexy social media platform ever, but it has 750m + members which is more than one in ten people on the planet and in developed countries, especially those for whom English is the lingua franca, it is more likely that if you’re in work, you’re on linked in- than not.

And people aren’t just “on” linked in, a good number of us actually use it as a newsfeed and as a place to catch up with everything from gossip to thought leadership – in our chose sphere.

We chose the information we get by choosing to follow individuals and by joining linked in groups. Most linked in groups aren’t managed with much avidity or conviction but occasionally you get a group that is, and linked in has taken to giving actively managed groups that serve a social purpose a helping hand.

I run a number of groups on linked in including Pension Auto Enrolment and Bryanston Alumni as well as a number of sub-groups that I’m going to wind up. None of these groups gets any help from linked in and they drift along with a little help from me.

But one group – AgeWage and Pension PlayPen has got the thumbs up from Linked in and is not just growing fast, but it attracting a phenomenal number of eyeballs.

Of it’s 11,000+ members, over 6,000 are actively engaging with the group at least once a week and each day I get around 40 posts to moderate of which I publish over half.  These posts regularly get more than 90,000 views a week.

It seems to me that people who are interested in the kind of things I’m interested in (as 96% of this group’s 11037 members are my first degree contacts). So I can see what is interesting my peers on a day to day basis

And I can see the types of people who find the content interesting

I can see what kind of work they do

I can see the employers whose employees are interested in the group’s content

and I can see where they come from


So I know that my group is catering for mainly UK based , financial services people who work for a diverse group of companies and located in the major financial services hubs in the UK.

What is odd, is that all this activity happens without a paywall and this huge amount of time and energy expended by professional people is being hosted by linked in as part of their offering and managed by me as part of mine.

It is odd because I suspect that linked in is increasingly where not just my blogs but the content of hundreds of organisations that are loosely connected with me, AgeWage and Pension PlayPen, finds its readership.

And yet virtually nothing is getting written about this. That is odd.

Why are linked in groups so used but so low profile?

The answer is in the first line of this blog. Linked in is profoundly unsexy, it is not a place people boast about spending time on and it’s a content distribution platform that is well down the list of media favorites below Twitter, Telegraph, Tic-Toc and Facebook.

I suspect too that many consider Linked in as a place people hang out on to find a new job or find a new employee.

But it is so much more than a web-based labour exchange, it is infact an information exchange and the people and groups we follow on linked in are increasingly shaping our thinking.

Since it is a free to use platform, it is diluting the value of pay to view content and eating into their advertising revenues. So it is unsurprising that  traditional sources of content are interested in commenting.

Like many great innovations, Linked In works because it simply does what needs to be done better than anyone else and does it in a most undemonstrative way.

If you are not already linked in to me , please do – or at least follow me. If you are linked in to me, please join AgeWage and Pension Play Pen linked in group using the link or finding it on linked in 

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Capturing the prize – or why you shouldn’t bet money you don’t have!



Was the  football side that beat Iran 6-2 an average team that played well or was the that drew with the USA a good team that played poorly? Our view of the England’s performance in the world cup is based on our expectations and on our perception of the other teams in the competition. In other words we use past performance to manage expectations and benchmark relative performance by watching other sides.

Based on consensus among punters, England are currently fourth favorites to hoist the Jules Rimet trophy behind Brazil, France and Spain, You can get around 8 to 1 meaning there’s not much more than a 10% chance of our side winning.

I am very happy to be represented by a team considered one of the four best in this tournament. I am comfortable that the side is well managed , has prepared well and is playing with a degree of skill and confidence that makes me feel proud and excited.

But I am not going to place money on England as my investment is already made. I am an England fan because I am English and I do not have to increase my excitement at the prospect of England winning by betting on my team. Some of you may know where I am going on this!

The best way of enjoying football (for me at least) is by watching it (I was never much good at the game).

The best way of me investing for my future is also as a spectator, I am a firm believer in diversification and getting market returns. My pension bet would be not to bet but to enjoy the action. I follow very simple principles that are focussed around the duration of my investments, the longer the duration, the more I look for long-term growth, for money which I need today, I look for stability and liquidity and for income that I cannot do without, I look for certainty.

So my income I can’t do without will come from the state pension and the income from work and from my works pension. The short term liquidity comes from cash in the bank and my long-term money, the stuff I’ll need from my late sixties to replace the money I get from work, will come from an investment in shares (equities). Organising my money in this way is that I am not in for too many nasty surprises. I am 99% sure about my pensions and cash and rather less sure about my future income from my longer term investments but I live with that uncertainty. This is my personal LDI strategy and it makes common sense to me.

You might (and John Ralfe would) think that I am taking a lot of risk having 100% of my DC pension pot invested in global equities at the age of 61. But I see my pension holistically, my DC pot is only about 40% of my prospective retirement income so I am holistically invested about 60% in bonds and 38% in equities and I have some money in the bank so that I don’t have to crystallise my DC pot in emergency. With me so far?

My personal discount rate against my liabilities (the money I’ve yet to spend) is around 60% bonds, 38% equities and 2% cash.

There are some small tweaks I will make to the way I ask for my money to be managed. I have asked that none of my money is invested in fossil fuels (which is part of my charitable investment – I would like to help provide a better planet for my son and his generation). My investment is tilted towards a better Future World.  But otherwise , I am accepting the market rate. In short, I hope the way I invest – reflects me, my views and values and will ensure I have a long and happy retirement where the money lasts as long as I do.

Bending it like Beckham

There is a school of investment thinking which does not follow my thinking but follows a more bendy path to goal, like a David Beckham free kick, it looks to avoid obstacles through  magical skill.

Here I smell the whiff of the bookies shop (which I never much liked). The decision to value pension fund liabilities not by the market rate but by the risk free end of the market (the gilt return) is a bit like saying that the only bets we should be taking on the winner of the world cup are the safe bets (Brazil, Spain, France and maybe England). But of course a winner could be found elsewhere.

If you invested on  a weighted average across all teams (so you’d invest 300 times more in Brazil than Wales) then you’d expect to get your money back (less a little spread to pay Betfair – the book is 98.6% round and there is some betting commission on winnings). This is the way that passive funds should invest.

Of course, you might like to have a side bet on Wales or Australia but that would be a bit of fun, not your investment strategy. It’s a bit like me asking for a tweak in my portfolio to match my personal convictions (making my money matter).

But what has happened in the strategic thinking of pension schemes is equivalent to betting on the big four in the market rather than betting on the whole of the market. To my betting instincts, this is creating a concentration of risk around Brazil, Spain, France and England or in investment terms, a focus on a sub-set of risks (mitigated by investing in gilts). That DB pension funds are so overly concentrated in gilts is because the benchmark (the investable market) is now prescribed by the gilt rate – which measures liabilities.

This is itself a bet, a bet against the long tail of investments (the teams in the big table below England in the betting).

To make matters worse, rather than betting with money that the pension schemes have in the bank, the pension funds have bet with other people’s money, money in the investment banks. Everyone who has ever bet money to pay off their overdraft knows that it’s a brilliant strategy so long as the favorites win, but what happens if Wales were to win and you’d bet your overdraft on Brazil?

I know that that is about as likely as the outcome of the mini-budget but…



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Find out how the PPF used LDI as part of its pension strategy

I think this will be a really excellent discussion.

Register or log in to http://www.pensionplaypen.com to attend. (events)

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LDI – the full unexpergated story

This is a text of an after-dinner speech I gave to the Pensions Network on Thursday November 24th.

Our story begins in 2004 when the UK adopted an accounting standard that discounted pension scheme liabilities to the AA Corporate bond rate.

In 2011, Professor Iain Clacher of Leeds University wrote

At a macroeconomic level, mandating the use of AA rated bond yields to discount the present value of pension liabilities has resulted in schemes purchasing greater amounts of financial investments which better match the estimated present value of their pension accounting liabilities. Pension schemes have been divesting real asset investments, such as equities, and investing in financial investments, such as long‐dated index linked gilts and corporate bonds, that are a better match for the estimated accounting liability. The systemic effect of this has been to exacerbate the bubble in long‐dated bonds and, in particular, index linked gilts.


If that sounds hard work for an after-dinner speech – relax. Things will get easier.


The Bank of England invests its staff pension scheme almost entirely in gilts and bonds, this costs the taxpayer just over 50% of the pensionable salaries, an amount beyond the means of most private sector employers. A better way had to be found to match investments to liabilities and the problem became of interest to Merrill Lynch and to two young bankers keen to explore secondary markets for pension products. They worked out that by swapping long term and short- term gilts using derivatives and by exploiting the Repo market (effectively a means of borrowing), pension schemes could create synthetic holdings of gilt several times the amount actually held. This was known as leveraging and the bankers, Rob Gardner and Dawid Konolu-Atulu set about selling the idea to large DB pension schemes. They found ready customers in Friends Provident and Royal Mail and this led to the establishment of Redington, an investment consultant named after a famous actuary but regulated not by actuaries but the FCA, powered by bankers using banking products to solve pension problems.


This version of LDI was very different from the vision of John Ralfe, who had – with brilliant timing – engineered the Boots pension scheme into gilts at the start of the century. It meant that schemes using this approach could have their cake and eat it, by borrowing gilts they could show they fully covered their liabilities, but through the leverage, they had money left over to buy real assets which could provide growth for the scheme and ensure that the contribution rate was kept well below 50% and at acceptable levels to the sponsoring employer.

Unsurprisingly, this approach soon became very popular, Redington prospered, actuarial practices soon started copying and today 60% of the 5800 DB pension schemes in the UK use this form of leveraged LDI. Not only was this concept adopted but it was maintained. From the beginning to the end of quantitative easing, low interest rates meant that bond prices remained high. In 2019, index linked gilts were the highest performing asset class. While liabilities were expensive because the discount rate was on the floor, the value of the LDI portfolio saved the day. The number of schemes into the PPF was smaller than estimated, despite dire predictions to the contrary, corporate DB plans stayed afloat and this was largely attributed to LDI. It should be noted that the last decade was also kind to other asset classes and while LDI invested schemes did well, so did others – who eschewed borrowing – schemes such as LGPS and Rail Pen – plus of course all DC schemes, became increasingly well-funded , especially when accounted for on a “best estimate basis” where the discounting of liabilities was linked to the return of scheme assets rather than AA bonds (or gilts).

But all good things come to an end and so did the low interest rates encouraged by quantitative easing and maintained by a relatively orderly economic climate. By 2022, inflationary pressures meant that interest rates started rising and the yield on gilts started rising fast. This meant that schemes were becoming very solvent very quickly which pleased everyone. But it also meant that the value of the gilts borrowed through LDI fell sharply. It was like having negative equity on your mortgage but worse as the banks were able to call for the margin between what the gilts were borrowed at and what they were worth. Trustees started having demands on them for increased collateral which, if not met, would mean that the borrowing would be taken away, denuding the scheme of all those synthetic gilts which made the scheme solvent and now super funded.

To keep the synthetic gilts in place, schemes would either deeds  get a line of credit from the sponsoring employer or start selling growth assets. The trouble was that much of the growth assets were illiquid (we know what that means) so all that could be liquidated were gilts, which were rather less valuable than they had been.

In July, Mercer issued its clients with a warning note, telling Trustees to buckle up for the ride and make sure they had provisions in place to meet cash-calls to come. The mechanism to convert assets to cash was known as a “liquidity waterfall” and schemes started to worry about whether the stress-testing that they had been assured had been done, had gone far enough.

It hadn’t.


On 22nd September, the Bank of England announced it would start buying back gilts as part of “quantitative tightening”

On the next day, the mini-budget announced a program of tax-cuts and spending that the market assumed would require £100bn of borrowing.

Over the weekend, Liz Truss and her Chancellor made it clear that the mini budget was only the beginning and more could be expected in November and the new year.

The uptick in gilt yields on the 22nd became a torrent by the following Monday and the collateral calls started arriving thick and fast. LDI had originally been conceived of as bespoke to each scheme – that’s the Redington way. But the demand for this wonder drug spread to smaller schemes who needed packaged solutions. Legal & General, BlackRock and Insight were first to pioneer pooled LDI funds where each scheme had effectively a protected cell in which their liabilities were matched.

But with pooled funds housing hundreds of these cells, the human resource needed to get each to cough up collateral was immense, especially as smaller schemes had less governance and took longer to get things done. Many of the smaller schemes could not buy extra units in their funds (the way collateral was posted) and so their assets were sold to meet margin calls. These assets were gilts, and this was how the “doom loop” happened. Selling gilts was like expecting a buyer to catch a falling knife and the pooled fund managers were having trouble giving them away.

By this point , the pooled fund managers had the ear of the Bank of England who now understood that this flood of unpurchasable gilts was putting the integrity of the gilt market in jeopardy. The Bank saw the potential for serous financial instability and that was when it decided to intervene.

By 11am on September 28th, the 30 year gilt yield had already risen 100 basis points on the day, this was as much as the Pensions Regulator had stress-tested the system for and things were in danger of getting out of control. The Bank announced it would buy up to £65 billion of gilts over the next fortnight with a hard close on October 14th. The Bank left pension schemes in no doubt that they had better have their house in order by the 14th. Despite this, the pension industry sort an extension which they hoped to be announced on the morning of 12th October

At 9. 30 that morning, I found myself on stage at the PLSA being asked by Fiona Bruce in front of 1500 people “Henry, do you support an extension of the support for long dated gilts by the Bank of England”. My answer was no – it felt like I’d farted in a crowded lift.

The Bank kept to its deadline and Kwasi Kartheng was fired on the 14th. The expected spike in gilt yields the following Monday did not happen and by the 20th the Prime Minister had resigned. The arrival of Jeremy Hunt and then Rishi Sunak had calmed the markets and rates returned to pre mini-budget rates.

Bud damage had been done. Con Keating and Iain Clacher estimate that so far this year, UK DB pension schemes have seen £500bn pounds “go missing” as a result of schemes matching investments to liabilities using gilts as the investment yardstick. £300bn of this is thought to have been lost since the mini-budget.

Many small schemes are thought to have been locked out of their LDI programs and have little to show for their investment in pooled funds. They are likened to the swimmer who when the tide goes out is found to be wearing no clothes. Many other schemes were forced to sell assets in a fire-sale, often to hedge fund managers buying on the yellow label. Employers are being asked to re-stock the shelves as scheme liabilities become more expensive again, as yields receive. This means yet more cash injections, money that is not going into DC pensions or helping staff meet the rising cost of living.

The pension industry’s reaction to this is to call what happened a black-swan which like all other financial disasters is considered a once in a thousand year event. Those of us like, I suspect the majority of you, and certainly me, are left asking some important questions.


  1. What if, instead of valuing pension scheme liabilities against a gilt-based discount rate, the actuaries had agreed a market return based on scheme assets? Would that really have reduced member security or would it simply have stopped the need for LDI?
  2. What if TPR or the FCA or PRA had intervened and deemed the use of Swaps and Repos “borrowing” – deeming leverage LDI illegal. What commentators such as Baroness Bowles to be the case.
  3. What if the Pensions Regulator had recognised that with 60% of pension schemes piling into LDI, there was systemic risk if things went wrong and stopped its spread?
  4. What if the stress testing by TPR , BOE and FCA had gone further and broken the LDI model, would this have required schemes to reduce or do away with leverage?
  5. And what if the people who read the blogs by Con Keating, Iain Clacher and others on my website, had taken notice of what was being said and unwound the leverage for themselves as some – (notably the PPF), did.

This is of course in the realm of speculation, but I do believe that the problems of 2022 were foreseeable for many years, and I do so because they have been predicted on my blog.

It seems to me, that the pension industry has been the architect of its own demise. It has forced billions to be diverted from productive use into DB pensions and much of that money has been frittered away meeting unnecessary collateral calls resulting from ill-advised if not illegal investment in banking instruments. Much of the investment has been made by people ill-equipped to understand the risks and – certainly in the case of pooled funds – the apparatus for ensuring collateral was properly posted, broke down.

The industry is now saying it will learn lessons, reduce leverage, widen the assets that can be posted as collateral and improve advice and governance, so people don’t find themselves naked on the beach in future.

But I question whether this is simply a patch on a broken system. We have new DB funding regulations under consultation, perhaps now is the time to go back to basics and ask how we invest our DB pension funds so that we are not forced into these artificial arrangements which look an accident waiting to happen.

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Small DB schemes – LDI’s unconsidered victims


How Aon explained LDI to clients (pooled buckets positioned as affordable risk reduction)

The PLSA has around 1400 members, give or take the odd  DC master trust, the vast majority run DB pension schemes. You can find who they are if you purchase the PLSA database

The industry bible “Pension Fund and their Advisers” lists around 2000 schemes, the vast majority are DB schemes, the information is available in book form or online (at a price).

The PPF and TPR jointly publish the purple book which lists around 5800 DB pension schemes operating in the UK.

So where do I find information of the 4000 schemes that aren’t searchable through commercial databases?

The answer is that you need to find their report and accounts but first you need to know who they are and that is not as easy as you might think. That’s because TPR and PPF do not list contributors to the data they get from scheme returns.

We know, from information that TPR has put in the public domain, that around 60% of all DB schemes used the leveraged form of LDI which nearly blew up the gilts market last month. We also know from the Bank of England that the part of the LDI market that was going into self-destruct, was that part invested in pooled funds and we know that small schemes that use LDI , use pooled funds.

So some quick maths suggests that of the 5800 DB schemes around 3000 used LDI and that even if all 1400 of the PLSAs big schemes used LDI , that still leaves around 1600 schemes too small to use the PLSA for its lobbying and conference services, using LDI. We can make an approximation and assume that these were the schemes in the pooled funds that nearly blew up and the one thing we know about them is that we don’t know who they are.

And yet…

One of the many tropes being put around about LDI is that small schemes didn’t do it. This is absurd, LDI pooled funds are big beasts and we suspect that 1600 small schemes are in them.

It’s also a known trope because I know lots of trustees and advisers who used pooled LDI funds , not least because when at Investment Solutions, I used to work in a team that sold L&G’s pooled LDI funds to the clients of what was then Alexander Forbes. That platform also used these funds to sell to other consultancies such as JLT and First Actuarial who used these funds either through that platform or directly with L&G, BlackRock , Insight and others.

Lordy, I was with Abrdn yesterday who told me that they ran a pooled LDI fund for clients, so did Columbia Threadneedle. All these organisations were marketing to the consultancies that provide investment consultancy to the thousands of small schemes in this country. If you want to read the pooled fund pitch, here’s Insight’s (dated November 2021)

Not all small schemes use LDI but many do. John Ralfe gave evidence yesterday that none of the small DB schemes he is trustee to , use leveraged LDI. But that does not mean that most eschewed LDI.  I won’t go into all the reasons why consultants recommended LDI to small DB schemes but it comes down to the same issue that big schemes had.  LDI allowed sponsors to feel in control of their balance sheet without having to pay the ruinous cost of Boots or BOE style “gilts only” DB investment strategy.

This worked until it didn’t , which was this year. But unlike the big schemes, that have the resource to manage the “liquidity waterfall” that prevents segregated schemes losing their hedges, small schemes seemed to rely entirely on the provider of the pooled fund to manage their collateral calls. Pooled funds don’t give you much notice to stump up the cash. If you want to keep your hedge in place, you are required to buy more units in the fund and you are usually given a period of grace to do so. But the situation leading up to the BOE’s announcement seems to have been so frenetic, that some pooled funds were terminating hedges before the period of grace was up.

Let’s be clear, if you don’t buy new units in the funds, your gilts are sold from under your feet and when the gilts are gone, the hedge is gone. As I told the Work and Pensions Committee yesterday, “it’s like standing naked on the shore after the tide’s gone out”.

As John Cunliffe of the BOE has said, the danger for pooled funds was that their only way of meeting collateral calls was selling gilts into the doom loop and if the BOE had not intervened, they might have had no price from the market for their gilts , meaning they could not meet their margin calls, meaning they became insolvent, screwing up the derivative and Repo market and causing lasting damage to the gilts market. Put it at its most extreme, these 1600 small schemes, who we know nothing about, could have triggered a financial crisis.

The Mariupol factor

We know that these small schemes have been badly impacted by the financial crisis but we don’t know who they are and how bad the damage is. It’s like thinking about Mariupol. We will have  to wait till later to hear the horror story and for now we can only imagine what has gone on. The trustees and their advisers are understandably not volunteering their bad news but I continue to speak with trustees and advisers who confirm that many of these schemes have lost the hedges that LDI supported and are effectively locked out of the pooled funds.

TPR does not ask for details of the positions schemes using leveraged LDI adopt, when they ask for scheme returns. They do not know which schemes have LDI and which don’t as a matter of course. So they too suffer the Mariupol deficiency, the fear that something awful has happened without access to the detail.

This would be bad but acceptable were it not for the promotion of the trope that small schemes do not use LDI. It’s like saying that Mariupol is alright because the last time we went there it looked great.

Slide showing 86% of BMO clients with assets under £500m used LDI pooled funds


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Digital Shiny Objects – a blog on crypto-currency and trust by John Mauldin

By John Mauldin | Nov 19, 2022  (thanks to Per Andelius for sharing)


Financial crises are really about trust. They tend to occur when people lose trust in assets, institutions, or people they had thought trustworthy. Whether the lost trust was a consequence of the crisis, or its cause is a different question. But they do seem to go together.

Sometimes trust is misplaced from the beginning. No one should have ever believed that tulips were guaranteed wealth, but plenty of intelligent people did. Other times the trust is initially justified but events negate it—events that may not be obvious until much later.

At some point, the pain from misplaced trust becomes so large that we begin to question our trust in everything around us. Who else could disappoint me? Thankfully, most trust catastrophes are small, contained situations. But they can become systemic, affecting entire systems.

All this came to mind as I read about the collapse of cryptocurrency exchange FTX. Its users—many of whom were hoping to escape a state-controlled financial system—can now only hope a state-controlled bankruptcy system eventually recovers some of their assets (talk about irony). I suspect they will be waiting a long time.

I haven’t written much about crypto because, quite frankly, I’ve never felt the attraction. I’m not against the concept; I understand the philosophical libertarian argument. But I keep trying to find a “use case.” Yes, I can avoid public/government scrutiny of my financial activities but so can all kinds of bad actors. I trade the inherent problems of fiat currencies for a different set of problems.

Cryptocurrencies can be extraordinarily useful for people in emerging countries with problematic currencies. But if you are in most of the developed world, the volatility and risk of cryptocurrencies has so far been greater than that of your local currency. Yes, the dollar is depreciating due to inflation. I can manage that with reasonable planning. Using Bitcoin or another cryptocurrency simply changes my risk exposure.

(Note: I am a huge believer in blockchain ledger systems, which have many other applications. I’m not sure cryptocurrencies are the best and highest use of this technology.)

The FTX episode is interesting because it says something about the risk environment and who investors “trust” with their money. I hesitated to write about this; simply raising the topic will probably get me attacked from all sides. It’s important, though, so I’ll put on my flak jacket and tell you what I think.

Assets, Not Currencies

I distinctly recall my first exposure to the digital currency idea. It was around 2012 at a gold conference. I had just finished speaking about the economy and markets when two young people with a video camera approached and asked if they could interview me about “bitcoin.”

I had no idea what they meant. They enthusiastically explained it was digital money invented by a mysterious person named Satoshi that anyone could acquire by solving some math problems. I can’t emphasize the word “enthusiastically” enough. This was going to replace gold with a secure, anonymous digital “currency.” It would keep governments from debasing their currencies and make all your financial transactions anonymous.

“Okay,” I replied, “that sounds innovative.” And that was pretty much all I could give them. It was completely foreign to me at the time. And yes, I should have just invested $5,000 and moved on. (Unfortunately, not the first nor the last life-changing-in-hindsight trade I will miss. Shoulda, woulda, coulda…)

As I learned more, I still didn’t see the attraction. In theory, I’m exactly the kind of person who should like a non-government currency. I am generally not happy with central banks, I value my privacy, and I (mostly) trust market forces to deliver whatever we all need. I was once quite a gold bug for similar reasons.

But I try to be an ethical pragmatist. I’m attracted to whatever works (again, within my ethical framework). If digital tokens could actually function as our currency and prevent political and central bank manipulation, I’d be all aboard. I have not seen evidence that is the case.

For a host of practical reasons, replacing government-issued currencies requires governments to give up power, which they will naturally resist. Governments love power. They don’t surrender it easily, even relatively benign, market-friendly governments, much less the more doctrinaire authoritarian statists.

This doesn’t make digital assets useless; it just means they are assets, not currencies.

In fact, this brings up one of my real fears. All the good intentions seem to have sparked interest in governments everywhere in creating their own digital currencies: Central Bank Digital Currencies (CBDC). I really don’t want my government to be able to track all of my individual transactions. I don’t want to be in what is essentially a spy state like China, where they know everything and you end up with a digital profile. I don’t want a social credit score that can be used to control me. I worry that a CBDC, which we will be assured has many benefits, will evolve into a Chinese-type social credit score or a Big Brother watching me a la 1984.

But that brings us back to the trust issue and FTX.

Intermediary Problem

Bitcoin was the original cryptocurrency but numerous others now exist, each with its own design and characteristics. The common thread is they exist on some kind of blockchain-like distributed ledger. You “own” them only to the extent you can prove it to the network, and they have value only if you can transfer them to someone else.

Therein lies the rub. Providing the necessary proof is difficult because you also have to do it anonymously. More than a few early enthusiasts lost access to their bitcoin because they misplaced or forgot their passwords. This is a huge risk. Without digital credentials, your asset is gone. You can’t just reset the password.

This is a technological evolution of the same problem gold owners have always had. You have this valuable object someone could easily steal. How do you keep it secure, yet accessible when you need it?

With gold you can buy a safe, bury it in the backyard, or stuff it inside the mattress. These methods are only practical for fairly small amounts, and still aren’t perfect. A determined thief, given time, can crack your safe.

For those reasons, gold owners often store their gold with some kind of intermediary, like a bank safe deposit box (which is what I do) or a private gold depository. Or they may keep it in some kind of securitized form, like any of several gold bullion ETFs. Those are safer in some ways, but the fact remains someone else has your gold. You have to trust they will a) not lose it and b) return it on demand.

This same problem exists in crypto. You can keep it under your direct control, which is an important feature to some people. Generally, however, people would like to do something with their cryptocurrency. Trading directly can be somewhat cumbersome so exchanges became the solution. The problem is, the exchanges are still trying to figure out how to get the whole transparency thing down. Not to mention the technology—Mt. Gox was just the first of what has now been several that had problems and collapsed.

The layers of trust sometimes go even deeper. Investors trusted their financial advisor who trusted a fund manager who trusted FTX. All these people now have a lot of explaining to do. This kind of trust, once broken, is very hard to regain.

If the FTX drama ends there, then it will have been just drama—terrible for those involved but leaving others unharmed. Will it end there? Right now, it doesn’t look like it will. There appears to be a great deal of contagion brewing.

I think that FTX has the potential to be the biggest financial debacle of our lives. Bigger than Enron, bigger than Madoff.

When the Tide Goes Out

The good news for the non-crypto economy is that firms like FTX have limited connections to the conventional banking system. Their problems shouldn’t spread as widely as a Lehman-like collapse would. They also aren’t part of the government-backed protective schemes like FDIC and SIPC, so taxpayer risk is minimal, too.

But that doesn’t mean this failure will have no effect. It goes back to the concept of trust we were discussing.

For one thing, FTX wasn’t the only player in this space, or even the biggest one. Here’s a list of the top cryptocurrency exchanges, ranked by trading volume.

Source: Liz Ann Sonders

FTX was far behind leading Binance which has a staggering $4.6 trillion in trading volume this year. (Much of that represents the same assets changing hands repeatedly, so the asset value is lower.) Regardless of how you look at it, though, this isn’t a small industry. FTX was big and had several peers in the same range. I have no reason to think any of them have the same kind of problems. I also have a hard time ruling it out. These “exchanges” aren’t like the NYSE. They don’t have the same kind of—if any—regulatory oversight, independent audits, and public visibility.

This lack of intermediaries means doing business on a crypto exchange requires an extraordinary amount of trust. I suspect FTX founder Sam Bankman-Fried saw this, which is why he developed a, shall we say, “memorable” persona and spent the last few years appearing on every crypto-related stage and screen that would have him. At every venue he would talk about values and charity. He is evidently very good at getting people to believe him. Familiarity is the first step to gaining trust. He worked hard to cultivate it.

Others helped. “SBF,” as Bankman-Fried is known online, had many celebrity endorsements, both the Hollywood kind of celebrities and the financial kind. A number of top venture capital funds invested in his endeavors, providing a kind of tacit endorsement. People assume VCs conduct the appropriate due diligence before they invest. If they did so with FTX, they seem to have missed a few things.

Exactly what happened with FTX is still unclear. The more we learn the more astonishing it actually is.

The now-bankrupt FTX has a new CEO, John Ray. He is quite well known for walking into financial disasters and trying to sort them out. Enron was his first brush with fame, but you don’t get to do Enron unless you already have a solid reputation. He was a bulldog and the Enron creditors loved him.

Ray went on to handle other lesser known but equally difficult situations. When you bring John Ray in to solve a problem, you know it’s a REALLY big problem. Here is what he said in a recent bankruptcy filing:

“I have over 40 years of legal and restructuring experience. I have been the Chief Restructuring Officer or Chief Executive Officer in several of the largest corporate failures in history. I have supervised situations involving allegations of criminal activity and malfeasance (Enron). I have supervised situations involving novel financial structures (Enron and Residential Capital) and cross-border asset recovery and maximization (Nortel and Overseas Shipholding). Nearly every situation in which I have been involved has been characterized by defects of some sort in internal controls, regulatory compliance, human resources, and systems integrity.

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated, and potentially compromised individuals, this situation is unprecedented.”

The more you dig into this the more you are amazed at the lack of adult supervision. SBF and his executive team took customer money and “lent” it to Alameda Research (effectively themselves), and then tried to trade their way to profits, lending themselves massive amounts of money along the way. Read this note from Forbes.

“FTX bankruptcy filings released Thursday revealed that FTX founder Sam Bankman-Fried, his cofounder Gary Wang and two other executives received a total of $4.1 billion in loans from his Alameda Research trading firm.

“Of that total, $1 billion went to Bankman-Fried in the form of a personal loan, while $2.3 billion went to an entity he controls, Paper Bird (Bankman-Fried has told Forbes that he owns 75% of the entity, with Wang owning the rest)—so that’s another nearly $1.73 billion at Bankman-Fried’s disposal. FTX’s Director of Engineering Nishad Singh got his own loan of $543 million, while Ryan Salame, the co-CEO of FTX’s Digital Markets subsidiary, received a $55 million personal loan.

“The obvious question: Where did all that money go? There are two principal areas we know about so far: political donations and personal investments.”

At this point there are more questions than answers. FTX clients should have asked them sooner, perhaps, but you can bet they’ll do it now. And not just with the crypto part of their portfolios. Again, it’s the trust issue.

The answers they get (or non-answers) will probably expose some other mistakes. Then what? If you have money in something that turns out to not be what you thought it was, you look for a way out. You try to sell. But to whom? Finding buyers may be hard when everyone is suddenly asking the same awkward questions all at once.

A very famous person who is sadly all too familiar with FTX was asked this week if everyone should redeem from any crypto exchange they were on. Long pause and silence. You can’t say yes because we know what happens when everyone tries to leave the room at the same time. But the implication was there.

Trust Comes Easy

Now, consider what else is happening. We have the highest inflation in decades, which is making the Federal Reserve tighten interest rates. We don’t know how long that will continue; I think into mid-2023 and maybe beyond if inflation doesn’t drop fast enough.

This will probably trigger a recession that hits the earnings of companies whose shares are priced for perfection. Meanwhile higher financing costs are making it more expensive to own all kinds of leveraged assets.

In other words, we already have the conditions for a major repricing of risk. In the same way people trusted FTX with their crypto, they’ve trusted CEOs to deliver strong earnings. They’ve trusted fund managers to buy the right stocks. They’ve trusted central bankers, regulators, and politicians to choose wise policies.

All that trust comes easy in a bull market. Warren Buffett, who has seen more bulls and bears than most of us, famously said, “Only when the tide goes out do you discover who’s been swimming naked.”

I’m very confident in saying many, many people are swimming naked in this market. It’s felt pretty good for quite a long time. But one reason it’s felt good is they aren’t really naked. They’ve had an unnaturally long high tide to cover themselves. That tide will go out at some point. I don’t know if FTX will be the turning point, but it could be. And if it’s not FTX it will be something else.

It will be supremely ironic if the asset class that tried to render “trust” unnecessary proves how critical trust is.

I get the whole desire to be independent. The problem is that humans, whether you believe in design or evolution, depend on other humans from birth. Infants are totally dependent on their parents and especially their mother for their very survival. Not all species are like that. Ours is, and we continue depending on each other in various ways through our whole lives.

In a world where the division of labor is at its greatest in history, we are forced to trust the “market,” people literally all over the world, who we will never meet, to deliver food, energy, and a host of goods and services. We have no choice. That’s good; it has enabled humanity to achieve amazing things and move billions out of poverty, given us longer lives and so many good choices. But it requires trust.

Trust is precious, something to be carefully protected. And when bad actors destroy that trust? You and I can deal with it, but the person down the street or across the country or world? Can they?

Who do you trust? I think FTX has the potential to call that into question for a host of theoretically unrelated issues. The answer is going to end up being radical transparency. FTX was a massive failure of due diligence.

I have done a large amount of due diligence on funds and managers as part of my day job. I wrote a chapter on due diligence in Bull’s Eye Investing almost 20 years ago. I listed 120 questions investors should asked advisors and fund managers. Today that list would be longer but the #1 issue? Transparency. If you don’t get it, then close your notebook and politely figure out how to walk away.

Reagan was right. Trust, but verify.

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It’s leverage wot dunnit!

Hidden borrowing, hidden losses and a hidden group of victims from the LDI crisis – that’s what came out of yesterday’s remarkable evidence sessions held in committee room 16 of the House of Commons.

Hidden borrowing.

The legal argument about whether repos are a means for pension schemes to borrow seems open and shut.

The only people who do not think that the use of Repo in LDI contracts isn’t borrowing are in the Pension Regulator and those who hide behind the regulator for legitimacy.

The use of Swaps to magic leverage in government bonds is argued not  technically borrowing as the borrowing happens within the swap. This is casuistry, the kind of legal argument that is punctured by common sense.

LDI was a means of borrowing gilts which turned from a tactical to a strategic strategy once pension schemes realised that quantitative easing was here to stay. The MPs who congregated to listen to Iain Clacher, John Ralfe and Con Keating will hear the same thing from Baroness Sharon Bowles and no amount of bluster from L&G and others about the benefits of LDI in the roaring twenties will hide the fact that when LDI blew up , it nearly took the Government’s means of long-term financing with it.

That LDI is borrowing is no longer hidden, that borrowing is illegal in pension schemes is no longer hidden and that the losses sustained this year as a result of the super saturation of gilts in DB pension strategies is no longer in doubt. John Ralfe superbly distinguished between the proper matching of liabilities and investments and the operation of LDI contracts – with spurious matching depending on illegal borrowing. Con Keating provided technical arguments to support him.

Hidden losses

For over a decade, we have been hearing that pension deficits , based on discounting liabilities at gilts + rates, were real. What was hidden was that most of the 2020s,pension schemes had the assets to meet liabilities on a best estimate basis. Now we find that £500bn has been wiped off the value of our occupational pension schemes as a result of the inexorable fall in gilts prices, resulting from interest rate rises and most recently, a loss of confidence in the UK Government to repay its debt.

The estimate of Clacher and Keating that total losses from falls in fixed interest securities held in our DB pension plans this year is £500bn, it is thought that up to £300bn of this has been in the past two months – attributable to the mini- budget. But the meeting heard that margin calls were being made much earlier in the year and that the industry was being warned of the risks associated with rising rates for the last 7 years. If there is any doubt that Clacher and Keating were not giving warning of the LDI crisis, then input either name in this blog’s search facility.

Attempts by others to camouflage these real losses in our assets are based on the same illusory metrics that allowed the Pension Regulator and their agents to demand money from UK corporates to fund imaginary deficits in the last decade. These illusory metrics now tell TPR that schemes are home and hosed on their race to buy-out. Sadly there is precious little by way of assets , for insurers to take on, a point made by Nigel Wilson yesterday when he refused to promise price falls for buy-out – arguing that the assets weren’t there on which he could make precious profits.

Bogus  deficits and now hidden losses, this is the pernicious impact of the wrong means of accounting for pension scheme solvency. It lies at the heart of the problem and Con Keating and Iain Clacher made this absolutely clear yesterday morning.

Hidden victims

The reason John Cunliffe of the Bank of England gave for the Bank’s buy-back facility was not to save the big pension schemes such as BT. It was to stop the collapse of LDI pooled funds which were in danger of defaulting on collateral calls because they could not get a price on the gilts they were selling to satisfy the bankers. These pooled funds weren’t owned by BT or the large schemes that form the core of the PLSA’s membership. The pooled funds own assets on behalf of the small schemes with assets of less than £250m whose positions are managed as protected cells of the pooled arrangement.

The victims of the near collapse of these pooled funds are small pension schemes who have found that their gilts have been sold at knock down prices to the market and then the Bank . Many of these schemes have lost most of their assets and also lost the capacity to borrow going forward (it’s called losing the hedge). As Con Keating put it, they have been locked out of their fund.

Because of lack of information (which will eventually appear when they publish their accounts) we don’t know who these victims are, what they’ve lost and what is worse – neither did they. The first many small schemes heard of their predicament was once the black swan had flown.

I was at a meeting of small schemes and their advisers yesterday afternoon. It was clear that nobody is talking about them as they are not newsworthy. It is also clear from comments made in the second session of yesterday’s evidence giving, that the trade bodies are in denial that these victims exist. Small schemes are the hidden victims of this crisis, they have no voice and there is no-one who wants to  turn over the stone to see the mess that lies beneath.

The other hidden victims of LDI are the retirement savers who are not being bailed out but will find that their employers cannot afford better contributions to their workplace pensions because the money in their DB schemes has been depleted (see yesterday’s blog).

My contribution to yesterday’s proceedings was to point out that many of the casualties of the LDI fiasco, are still buried under the rubble of collapsed pooled funds.

Time for a more honest approach

I was proud to sit alongside John Ralfe, Con Keating and Iain Clacher yesterday. They carried the argument with strength and rigour. I hope that their disinterested evidence has resonated with the MPs present and that the powerful messages from our session were not diluted by what followed.

It’s leverage wot dunnit!

All four of us said the same thing to the Work and Pensions Committee, the level of leverage in LDI going forward should be zero.

Pretending that we can carry on with hidden borrowing , disguising real losses with fake accounting and ignoring the real victims of the LDI fiasco, is no longer an option.


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