Minister Robertson, UK Pensions, and Risk

Written By: - Date published: 9:44 am, October 15th, 2022 - 19 comments
Categories: Deep stuff, economy, grant robertson, kiwisaver, politicans, uk politics - Tags:

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

There’s a specific set of New Zealanders who won’t feel it: Kiwisavers and home owners with high mortgages. But is that reasonable?

We have been used over the last decade to a long bull run in which a relatively steady global economy and massive increases in house prices have made savings feel bullet proof. It’s given us a lot of confidence when so much of the world is in financial chaos. Perhaps we’ve forgotten that all investment involves risk.

Those in even riskier investment categories quite unguided by professional advice like Sharesies will have seen all the tech stocks pulling their money down into something very, very dark. Unless at the start you just held your nose and bought oil companies.

That confidence is gone for now. But it is unreasonable to attribute such instability to this Labour government.

Our Financial Markets Authority tracks the great myriad of Kiwisaver funds. Best to rely on their data rather than the many other aggregator evaluators out there.

This is where it’s worth comparing the actions of the UK government and its central bank with that of New Zealand right now.
In the UK, insurance companies that give defined benefit pension schemes have been forced since 2008’s financial crash to keep aside reserves for difficult circumstances. The UK government has proposed policies that have generated massive instability for those schemes trying to get their money so that they can pay out.

The UK doesn’t have the backstop of the NZSuperFund to provide everyone with a floor of minimum income in retirement. So this stuff is really, really important for millions of UK citizens seeking to finally stop work. A total of more than 18 million people are affected by the UK pension crisis in some way. Of these more than 2.7 million people still pay into defined benefit schemes. About 4.77 million people belong to schemes closed to new members. A further 3.4 million are in schemes that have shut to new accruals.

The UK pension regulator says there are a further 5 million people who have left their employer and are deferred members.

That’s a lot of citizens, a lot of media commentators, a lot of voters getting really insecure when government policy intervention has appeared to cause investment panic so big that the Bank of England has now had to intervene three times with a simply massive bond-buying effort.

The Bank of England has had to step into the market with massive interventions to ensure there are enough buyers and sellers at any one point in time.

Also gives you an idea why the British Prime Minister just fired her Head of Treasury a few hours ago.

If there are just two words to sum up the performance of New Zealand’s Minister of Finance Grant Robertson, it would be simply: “steady ship”. He’d have reason to be happy with that description given what has faced the country over 2 years and is likely to come.

The UK has based much of its economic competitive advantage on the power and competence of its financial markets. That reputation has been dented over the past month and it is due to political mismanagement from the Conservative Party.

The New Zealand Labour government on the other hand, even as we go through great investment uncertainty this year and in the year ahead, should reasonably be given some credit for the stability it has provided. On that measure alone we are better off.

690,000 Kiwisavers and the 28% of New Zealand with a mortgage might not feel that at the moment.

The political question is whether Kiwis currently losing money on paper can remember this: all investment involves risk and it’s entirely fair for our government to only manage so much of that risk and for the rest to fall on us the investor. Will irrational anxiety beat rational risk in our upcoming politics?

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

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  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.