Gilt crisis was major factor in £500bn hit to UK pension funds, MPs told


The gilt market rout that forced UK pension funds to rapidly sell assets in September helped drive down the value of retirement schemes by as much as £500bn, MPs were told on Wednesday.

Giving evidence to the Commons’ work and pensions select committee, Iain Clacher, a professor at Leeds University Business School, said based on his calculations “roughly £500bn is probably missing somewhere”.

“And this isn’t a paper loss,” he added. “This is a real loss because pension funds were selling assets to meet the collateral calls.”

Thousands of corporate pension plans had to raise cash to meet urgent calls on so-called liability-driven investing (LDI) strategies as gilt yields shot up following the government’s bungled “mini” Budget.

Clacher said total scheme asset values had fallen by about £500bn since the start of this year, with the sell-off during the gilt crisis the major factor in that. At the start of 2022, total defined benefit scheme assets stood at about £1.8tn.

“Nobody knows exactly how much was sold [in September], but turnover figures would suggest between £150bn and £200bn of gilts,” he said following the committee hearing. “Illiquid assets were also reportedly sold, for which we have no values now.”

Independent consultant John Ralfe told the committee that ‘hidden leverage is always a bad thing’ ©

John Ralfe, an independent consultant, laid the blame for the liquidity crisis on City advisers promoting leveraged LDI contracts.

He told the committee the investment consultants who advised pension trustees to use leverage with LDI strategies were the “villains in the piece”.

“The thing that has absolutely shocked me in what we have seen in recent weeks is hidden leverage,” said Ralfe. “Hidden leverage is always a bad thing.”

Con Keating, head of research at Brighton Rock Group, said the LDI market crisis was “entirely predictable”.

“It was leverage which led to collateral calls when gilt prices came down, and short rates started to rise,” he said. “That’s what triggered everything else. And that was all entirely predictable.”

Investment consultants who gave evidence to the committee said scheme funding levels were the strongest they had been in years and defended leverage use in LDI.

Leah Evans, chair of the Institute and Faculty of Actuaries, a professional body, said LDI had played a “really valuable” part in protecting defined benefit scheme member security.

“I disagree . . . that any leverage is bad,” she told the committee.

“To my mind, it is all about the level of leverage that’s used. Higher levels of leverage clearly introduce more risk but it is also how the LDI portfolio fits into the wider strategy of the pension scheme,” said Evans.

She warned against a “knee-jerk reaction” such as a ban on leverage, instead saying “more guidance and data collection could be helpful but the problems (with leverage use) are more scheme specific”.

Steven Taylor, chair of the Association of Consulting Actuaries, said LDI had been “extremely helpful” in keeping pension contributions “predictable” for scheme sponsors, seeking to mitigate the funding risks of both interest rate and inflation movements. “What happens if those contributions are not predictable,” he asked.

However, Jonathan Camfield, partner at Lane Clark & Peacock, which advised on LDI, told the committee he supported “new constraints” on the use of leverage by pension schemes.

“There is a risk without further guidance from regulators, or potentially rules, that competitive pressures over time just put leverage back to where it was (pre-crisis) because leverage is very efficient and [a] useful [thing] to use,” he said.


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