ALEX BRUMMER: First aid for our pensions after the LDI disaster

Liz Truss complains in her mea culpa that when the mini-budget for tax cuts was unveiled in September, no one at the Treasury warned her that the package could have a devastating impact on fixed-wage pension funds.

There was good reason for this. Neither the Treasury nor the Bank of England were alert enough to think that liability-driven investments (LDIs), lending against UK government bonds in complex derivatives markets, posed a risk to stability.

The Bank’s most detailed discussion of LDIs took place in 2018 in the far reaches of a Financial Stability Report. It proposed regulatory interventions, which never took place.

As a result, when the government bond market trembled in the aftermath of the mini-Budget, it was close to the collapse of the UK pension system.

It is extraordinary that the Bank and other regulators have ever allowed gilts to be used in high-risk derivative strategies, undermining the lifetime savings of ordinary citizens.

Five months later, some of the country’s top pension advisers – Barnett Waddingham and XPS Pensions – have determined that enough is enough and have downgraded their ratings for some pooled LDIs to their lowest levels. They have ruled that gambling with people’s pension funds is unsafe.

This is a reminder of how the rating agencies, who had no problem with slashed and diced unreliable mortgages before the great financial crisis of 2007-2009, quickly changed direction afterwards.

Pension advisors and managers shouldn’t have had a truck right now with the quick fix for shortfalls that LDIs offered in the first place.

The Commons investigation into the meltdown is ongoing, but it was clear from the start that regulators and those marketing LDIs had no idea of ​​the risk.

BlackRock, along with Insight Management and Legal & General, are challenging the advisors’ findings.

It is almost certainly true that, as larger players in the LDI market, they were less exposed to the 1.6 percentage point blowout in bond yields and could handle the demand for more collateral.

No one should ever think it was ever a good idea to convert gilt-edged stocks into a high-risk asset class.

Family affair

Who even knew outside investors could buy shares in the most awarded name in banking Rothschild & Co?

Some seven generations after the bank helped fund the Duke of Wellington’s victory at Waterloo, clan chief Alexandre de Rothschild, son of Baron David, is trying to consolidate the property.

The road from public to private is well paved. The Rothermere/Harmsworth family, publisher of the Daily Mail, went through much the same process last year.

Family dynasties seeking to protect a gilded heritage need not expose themselves to the uncertainties and costs of the stock market – unless there is a demand for new equity capital.

Unlike many of the investment banks, Rothschild does not have a trading arm and is primarily an advisory and asset management company, so it does not need limitless new capital.

The property cleanup began under Baron David when he brought NM Rothschild in London (mainly the creation of his late cousin Sir Evelyn) and the French arm together under the umbrella of the quoted French vehicle Concordia.

Under the current plan to go private, some 15.6% of the shares, loosely held by family members, would be mopped up alongside outsider shares.

There is likely to be some minority unease about the price. Rothschild has long traded at a significant discount to peers like Lazard. There is always room for a sweetener.

The next target could presumably be to get the estranged Swiss private bank Edmond de Rothschild into the fold.

There’s a time for everything…

Gilded future

Gold is still considered a safe haven, as we learned at the start of Russia’s war against Ukraine when it was revealed that about £110bn of Kremlin reserves are held in bullion.

US-based Newmont, as the world’s largest gold producer, is eager to reunite with its former Australian exploration arm Newcrest and has taken the opportunity through a leadership break to launch a £14bn bid.

The bid price is considered lukewarm, so it wouldn’t be surprising if Toronto’s Barrick enters the fray.

The opening move, on a gilded chessboard, has been made.