Industry view
TPR IS THE PERPETRATOR, NOT THE VICTIM OF THE CRISIS IN GILTS MARKETS
Con Keating is head of research at Brighton Rock Group, while Iain Clacher is professor of pensions & finance at the University of Leeds
“In all the circumstances of the present case, I feel able to attach only the slightest weight to the views of TPR.” Mr Justice Warren¹
Having read The Pensions Regulator’s response to the questions posed by the parliamentary Work & Pensions Select Committee and their new guidance – Managing investment and liquidity risk in the current economic climate – we find our- selves arriving at the same conclusion as Mr Justice Warren.
And we are far from alone. In a Chartered Institute for Securities and Investments (CISI) webinar on the gilt market crisis, we asked the 359-registered attendants if they agreed with the following statement: “When questioned about their involve- ment with liability driven investment, the Wall Street Journal reports: “A spokesman for The Pensions Regulator said it “…does not drive particular investment strategies.” 71% of respondents disagreed, while 11% agreed. Patrick Bloomfield, of Hymans Robertson and chair of the Association of Consulting Actuaries, sought to bring some clarity to the situation in a LinkedIn post: “Why have so many DB schemes used leverage (LDI) to invest in gilts? “Regulators have been pushing schemes to
reduce risk and improve funding quickly, stimulated by scandals like BHS
and Carillion. Leverage enabled de-risk- ing and earning returns simultaneously. Without leverage it would either take longer or need bigger contributions to hit regulatory targets.”
Irrelevant, false or misleading The declines in gilt prices in response to the mini budget, which triggered the meltdown, were relatively mild. It is clear that declines of 5.5% over two days overwhelmed some “big risk buff- ers” and triggered the LDI spiral. Our contention would be not that we were at risk of spiralling out of control, but rather we were already well into that process by the 26 September. Without the Bank of England intervention, there is no telling where this spiral may have stopped or the damage that this would have wreaked. The Pensions Regulator appears to con- sider itself victim of the assault on the gilt market, not its perpetrator when it sug- gests that LDI had been a successful strat- egy which should continue largely unchanged. But this mixture has proved explosive, TPR’s solution would be to remove a fis- sile material and leave something that is merely highly flammable in its place. As for the prior success, this is true of all but the most abject of speculative strategies. Turkeys live a satisfied life until Thanks- giving. To repeat the well-known quote from The Black Swan: The Impact of the Highly Improbable by N N Taleb: “Some- thing has worked in the past, until – well, it unexpectedly no longer does, and what we have learned from the past turns out to be at best irrelevant or false, at worst viciously misleading.”
Indirect answers to direct questions TPR also fails to answer explicit questions posed, such as: “Did TPR ask the Bank of England to intervene?” Its response is: “As the gilt market instability developed, we established regular contact with the Bank of England and other regulators about what action could be taken to mitigate risks from rapid changes in the gilt market. Fundamen- tally, it was the Bank’s decision to intervene in the way it did.” In common with much else in these documents, it is necessary to interpret these Delphic mutterings. So, that will be a “no” then, will it? In many other blogs², we have challenged the legality of schemes using repo to bor- row and the use of derivatives to hedge liabilities; these TPR documents fail even to recognise, let alone respond to, those challenges. The circumlocutions, in lan- guage and logic, needed to achieve that are almost impressive. TPR’s response draws heavily on the Bank of England’s response to the treasury committee; its own data is woefully inadequate and even mutually inconsistent. By way of ending, given their centrality in LDI strategies and the crisis, we were astonished by the complete non-appear- ance of the words ‘repo’ and ‘derivative’ in the 6,200 words of those documents. The Bank of England showed no such reti- cence. It therefore begs the question, why TPR did not?
These documents are worthy of Fawlty Towers: “Don’t mention the war”, and bring to mind the theme tune of Dad’s Army: “Who do you think you are kidding, …”?
1) From PNPF Trust v Taylor [2010] EWHC 1573 (Ch) judgment of Warren J delivered on 28th June, 2010. 2)
https://henrytapper.com/2022/03/28/keating-and-clacher- debunk-ldi/
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a.holt@portfolio-institutional.co.uk 10 | portfolio institutional | November 2022 | Issue 118
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