Minister Robertson, UK Pensions, and Risk

19 comments on “Minister Robertson, UK Pensions, and Risk ”

• Comments are now closed

1. SPC 1

   15 October 2022 at 10:13 am

   When my Kiwi Saver provider was removed from the government scheme a year or so back I was transferred to a conservative fund at the BNZ – I was however advised to go to to the category I was at formerly at (ultra conservative) because of my age (thus have little risk).

   I'm still getting good dividend returns on the power company shares sold below market price by National (100% or more CG and likely to be untaxed when sold).

   Like many of the generation no mortgage, so just facing a long overdue correction in property asset value (still higher than 2020 value which was above the high enough 2017 values). And of course the current mortgage rate cost might impact the amount of renovation work undertaken and cause a delay to reverse mortgaging. Such is hardship, one might have to sell up and move into a place with less land.
2. aj 2

   15 October 2022 at 11:14 am

   A simple and rational question in the later part of a political term is: am I better off

   As you go on to describe it is neither simple nor rational. And explaining is losing. Your last para is the important one and the answer, unfortunately, is probably no. Irrational anxiety wins every time.
3. Nic the NZer 3

   15 October 2022 at 12:04 pm

   Discussion of the actual basis for BoE intervention in govt bond markets. The actual reason for why UK pensions could not tolerate relatively small fluctuations in UK govt bonds missing from this post unfortunately.

   http://bilbo.economicoutlook.net/blog/?p=50528
   • Pat 3.1

     15 October 2022 at 1:46 pm

     "One of the related problems is that pension funds are managed according to the greed principle rather than to exclusively ensure liabilities can be met.

     The latter goal is relatively simple – just invest in risk-free assets that deliver a known principle at a known maturity.

     So if you need $30 billion in 20 years time, the easiest way to guarantee you will have it is to buy a 20-year bond that has a face value of $30 billion."

     http://bilbo.economicoutlook.net/blog/?p=50528

     Indeed, so why were pension funds in a position to be margin called?….particularly in the recent market conditions? A piece i read recently indicated that pension fund leverage was considered a no no….apparently not.
     • Ad 3.1.1

       15 October 2022 at 2:07 pm

       Here's another version of why pension funds reacted so fast and so big, including the letter from the Bank of England to the UK Treasury Committee explaining its actions:

       How a sleepy corner of the market nearly triggered a meltdown | CNN Business
       • pat 3.1.1.1

         15 October 2022 at 7:52 pm

         "LDI has evolved from that into something quite different from just hedging liabilities to pay pensions. What we see now is happening because pension schemes have been speculating — investing in equities, private equity and hedge funds, with disguised borrowings or leverage — not hedging. By increasing leverage, many UK pension schemes have been operating as badly run hedge funds, increasing risk for themselves and the whole financial system. This greed, stupidity and laziness was encouraged by investment consultants, who get paid for complexity. Some pension schemes have bought “leveraged gilt funds” — the clue is in the name. These instruments create leverage through derivatives and gilt repos, which allow holders to exchange government bonds for cash. The economic risk is taken on by the pension schemes."

         https://www.ft.com/content/98c35e6a-079b-498a-9842-f8b0f3faf232
         • Poission 3.1.1.1.1

           15 October 2022 at 8:16 pm

           The problem was that the shock and subsequent moves in interest rates ( in response to the mini budget and its 60b pound hole) was huuuuge,never seen in the history of interest rates and everyone ran for a small door at the end of the theatre.

           Now, institutional investors’ risk models (trust me: first-hand experience) are mostly based on 5-10 years historical volatility and hence unprepared to deal with such moves.
           The amount of cash required to meet margin calls when the move in interest rates is 6-8x standard deviations is very large.

           And remember where this cash has been invested?
           Mostly in riskier assets that Clearing Houses won’t accept as collateral.
           Pension funds also don’t have direct access to the Central Bank, which makes it impossible for them to post collateral and receive funds to meet margin calls this way.

           All of a sudden, the most typical liquidity problem arises.
           The only way out is to liquidate assets (bonds, stocks, all!) and meet margin calls to avoid a liquidity problem morphing into a solvency issue.

           https://themacrocompass.substack.com/p/pension-fund-drama#details

           Here in NZ,with our large investment in pension funds ( over 33% of gdp private alone) it adds risk to the investors and the lenders where flows are necessary for pay outs,for retirees and those cashing up to fuel the property bubble.

           Also the government expanded the methodology used in ascertaining sovereign debt to gdp,by including assets from wealth funds such as ACC,NZSF,and revaluing the housing corp estate,all of which have taken substantive hits since the june data close.( only 7 b of wealth funds losses accounted for) in FYI ending june.
           • pat 3.1.1.1.1.1

             15 October 2022 at 10:10 pm

             Understand the effect of the margin call but dont get WHY pension funds (supposedly conservative) are exposing themselves to derivatives risk…the (future) payments are known and finite and all that is required is a diversified portfolio (including bonds) and the power of time and compounding interest…..something actuaries do every day

             It is a good link…though not exactly reassuring.
             • Poission …

               15 October 2022 at 10:22 pm

               Pension funds whilst conservative biased,had the problem with low interest rates (or even negative such as europe or japan) which meant they were not getting returns needed to meet future demand.

               There maybe have also in the UK been a higher demand for full payout with covid etc.

               The NZ superfund also undertakes high risk investments with companies that have PE ratios >40,which is problematic if they are bleeding cash.Also with the high overseas weighting of investments an appreciation in the NZ$ would make the overseas assets depreciate further as the currency hedges expire.
               • pat …

                 15 October 2022 at 10:32 pm

                 Get that, but we are talking long term …and acknowledge rates have been low for an extended period, but not worldwide, there has been opportunity in other markets and equities have (until recently) boomed with those low interest rates, so no lack of opportunity there.

                 Consider the impact on say the NZ Super fund, excellent returns until last year (with loses) but the expectation is it will recover over time, and should it fail to meet projections we wont know for a decade or more and will cut our cloth at the time….or alternatively it may surprise on the upside (it would be a surprise imo)
               • pat …

                 16 October 2022 at 6:23 am

                 Further thought…it is a 'quality' problem.

                 The quality of collateral is the issue , quality being a proxy for (secure) return and return is a function of growth.

                 We cycle back to growth….always.

                 Ironically so does Truss
                 • Nic the NZer …

                   16 October 2022 at 9:31 am

                   Leveraging your investment adds risk. This remains true regardless of the 'quality' of collateral put up.
                   • pat …

                     16 October 2022 at 9:41 am

                     It may remain true, but risk, or the perception of, impacts willingness…..collateral is only of use if it is acceptable.

                     Nobody will lend secured against something perceived as worthless (or insufficient)
                 • Poission …

                   16 October 2022 at 10:41 am

                   Its also a quantity issue,increasing leverage to get more blood out of same asset.

                   With all asset appreciation (value) a substantive part of the growth is debt,which becomes exposed when the tide comes out.

                   The high rates of interest are now a real part of both borrowing and lending and are not transitionary they are here to stay,until demand for debt is lessened.

                   NZ is a highly indebted country with a substantive current account deficit ( higher then the UK) and limited ability to service our debt through exports,if we cannot start to live within our means.

                   Selling productive NZ assets to overseas entities only increases investment flow offshore (called profits),and interest bills are increasing,as is inflation and the debt treadmill.
                 • Nic the NZer …

                   16 October 2022 at 11:08 am

                   That touches on what I think is an interesting question, does the availability of govt debt at a 'risk free' rate of return feed into this leveraging strategy.

                   What has the private sector created which is as stable a collateral investment (nothing?). Nobody appears to be selling derivatives hedged in bit coin (because you'd have to be insane to do it).

                   So the question is, should the govt stop issuing debt does this part of the market disappear? and where do (non-leveraged) pension funds actually invest at a low risk level?
                   • Pat …

                     16 October 2022 at 3:02 pm

                     "does the availability of govt debt at a 'risk free' rate of return feed into this leveraging strategy."

                     I suspect so….though erroneously as recent events have demonstrated.

                     "So the question is, should the govt stop issuing debt does this part of the market disappear? "

                     If the (all) Gov stop issuing debt (or purchase all their own) then it must

                     "and where do (non-leveraged) pension funds actually invest at a low risk level?"

                     Depends on the definition of low, but without Gov Bonds then blue chip equities and infrastructure…as they currently do alongside bonds.

                     It is worth noting that the (various) Govs don’t have to stop issuing debt for markets to freeze…lack of confidence can have the same effect.
4. Cricklewood 4

   15 October 2022 at 8:13 pm

   Realistically is obtuse market instruments using derivatives etc that are the real problem. Basically the capacity for disaster is greatly increased.

   Also while it's nice to talk about investment risk when it comes to Kiwisaver the reality is you dont have the ultimate level of control. You can't pull your money out.
5. Mike the Lefty 5

   16 October 2022 at 8:10 am

   I certainly have more confidence in Grant Robertson as finance minister than any of the "economic wizards" that National like to think they have.

   But like many others my Kiwisaver account seems smaller every time I log in (I have stopped doing so) although I keep contributing.
   • Craig H 5.1

     18 October 2022 at 4:40 pm

     Mine is doing that as well, but that's reflective of it being in a growth = higher-risk fund in difficult times for markets. If I moved it to a cash fund, it would stop falling at least.

• Comments are now closed

• Log in
• Donate
• Contribute post

• Articles RSS