Supplementary evidence from SOCial ECONomic RESearch London and Frankfurt LDI0052

Previously submitted LDI008

Supplementary Evidence on LDI

The call of evidence opened with the following

Increases in yields on long-dated gilts in late September and early October meant defined benefit (DB) schemes using liability driven investment (LDI) strategies needed to deal with the rapid increase in collateral required to support the LDI trades.

I have already submitted evidence under the title LDI – whale or minnow, minnow or fugu. I was concerned about the extent of LDI.

I watched the evidence proceedings on 23-11-22 including that given by Prof I Clatcher.  Since I am concerned about the “size” of the problem, I feel it is incumbent upon me to add a supplement to my evidence.

The Financial Times of 24-11-22 carried the headline “Gilt crisis was big factor in £500bn hit to UK pension funds”.  The suggestion was made that “the gilt rout” and the “rapid selling down of assets” meant that “roughly £500bn … is missing”. 

£500bn constitutes roughly one third of the oft quoted £1.5tn of assets held by DB pension funds regulated by the PPF.

An earlier Financial Times article from 2-11-22 claimed that “Apollo Global had bought $1.1bn of assets during gilt crisis”. This “accounted for about one third of the collateral loan obligations sold by pension funds”.   It suggests that total sell offs might have been about $3.3bn, which is roughly £3bn – nothing like £500bn.

If there is any explanation for the £500bn, it is to be found in the (contestable) assertion that attempts by pension funds to match assets better to liabilities – as being asked for by, inter alia, the Pensions Regulator, led to their investing less in growth products and more in bonds.  This is a very different form of liability driven investment. It does not imply “leveraged LDI”, which was what prompted the WPSC inquiry.

November 2022