Kwasi Kwarteng’s budget eviction has cost pensions £75 billion
Former Chancellor Kwasi Kwarteng’s eviction of Budget has cost pensions £75 billion, according to a report from a US investment bank
The near-collapse of the pensions market that led to a Bank of England bailout has already cost companies’ pension schemes £75 billion, according to a report from a US investment bank.
The massive loss in value reflects the exposure many private sector pension funds have to liability-based investment strategies.
They use LDIs to ensure they can pay future payouts to 10 million participants in defined benefit plans, which pay guaranteed pensions based on employees’ wages at retirement.
Fire sale: Many funds came loose after former Chancellor Kwasi Kwarteng’s disastrous mini-budget led to an unprecedented sell-off in September
LDIs use leverage — or borrowing — to boost the yield of government bonds, also known as gilts.
But many funds came loose after former Chancellor Kwasi Kwarteng’s disastrous mini-budget led to an unprecedented sell-off in September.
JPMorgan estimates asset sales alone have cost pension funds between £65bn and £75bn since August. That compares to total assets of £1.7 trillion at the start of this year.
The estimates are based on the bank’s forecast of this week’s figures from the Pension Protection Fund, the safety net for the interests of approximately 5,200 final salary funds.
But the final cost will likely be much higher. “We estimate that about 25 per cent of the assets have been lost,” said Iain Clacher, professor of pensions at the University of Leeds.
Supermarket group Sainsbury’s announced last week that it has made a £500 million loan available to its fund to avoid a forced sale of assets. The pension fund had already fallen by 30 per cent to £8.2 billion in the year before the LDI market exploded.
The BT pension fund, which has increased its LDI use in recent years, says it has lost £11bn in the turmoil. The telecom giant’s fund has fallen by more than £21bn since June 2021 as a result of its LDI strategies.
BT defended the use of LDIs this weekend. During this period, assets for hedging liabilities performed as intended. They have declined in value with a decrease in the present value of our future obligation to pay pensions,” it said.
‘As a result, the financing position has not deteriorated.’