ALEX BRUMMER: Pensions fail a stress test amid UK bond market turmoil

When it comes to financial markets, you learn new risks every day. At the time of the financial crisis in 2007-2008, the country had to deal with subprime mortgages, collateralized debt obligations and all kinds of complex instruments that were loaded onto the balance sheets of our banks and mortgage banks by the casino investment banks. .

So we should be thankful that consumer banks have been shielded from their over-smart trade weapons for nearly a decade.

Now we hear of a new abomination at the heart of the British fixed-salary pension system. If you thought your money was safely locked up in gilts, publicly traded stocks, and other tangible assets, it’s not quite right.

Due to the current turmoil in the market for UK bonds, which are widely regarded as the safest asset to hold due to His Majesty’s government guarantee, think again.

Instead of allowing assets to simply do nothing, the people who run our pension funds, about £2.5 trillion, are making them sweat.

I’ve long wondered why it’s worth it for the big insurers and pension funds to lend stock (for a fee) to activists and hedge funds with agendas to turn around quickly, often at the expense of ordinary private investors and national interest.

It is the search for those elusive returns.

It should therefore come as no surprise that a gigantic new ‘Liability Driven Investments’ (LDI) bubble has exploded at the heart of the financial system.

Most frighteningly, the hard-earned money saved by working people throughout their lives may be at stake.

Pension funds use LDIs to maximize returns by leveraging, or borrowing against, the assets in these funds.

If you thought the precarious element in these funds was the stocks that have health warnings written on them, you’re wrong.

The soft underbelly is the £1 trillion tied up in government bonds and borrowed to the limit.

So when bond prices plummeted after the Liz Truss administration did its best to save growth, it set off a chain reaction. The collateral, the bonds, was no longer worth as much as the loans taken out against them.

Lending threatened to fail, resulting in a potential catastrophe for both pension funds and banks.

Fears of a meltdown were imminent and this prompted a financial crisis-like intervention by the Bank of England after receiving compensation from the chancellor. It appears that the Bank of England’s Financial Stability Committee had its eye on LDIs as early as 2018.

But anyone who has ever read any of its reports knows that it also monitored other more glamorous risks to consumers and markets, ranging from cryptocurrencies to credit card debt.

Something as technical as LDIs normally would never have gotten a second look. Now they are blown up in everyone’s face, with a possible bill for the taxpayer.

Somewhere, someone – the Bank of England or the pension regulator – has to take responsibility for a terrible debacle in an industry where safety must always be the watchword.

Fund funk

As someone who has followed the activities of the International Monetary Fund (IMF) for longer than I can remember, one could not help but be disheartened by his knee-jerk reaction to economic measures ushered in by Liz Truss.

The Washington-based fund is known for its economic integrity and sets the benchmark against which other forecasters are judged.

The annual ‘Article 4’ inspections of national economies are based on thorough study of the books and interviews with top elected officials and other officials over several weeks.

It is therefore incomprehensible that this lofty body finds it necessary to rap the UK over the Kwasi Kwarteng fiscal package.

It has not proved ideal that the package was exposed without a longer-term plan to put Britain’s public finances in order. But that is no excuse for hostile IMF remarks.

It should recall how Kristalina Georgieva, the general manager, allegedly favored China in her previous job at the World Bank, making the US hostile to its stewardship.

Beware of throwing stones.