ALEX BRUMMER: Britain must keep cracking down on the pension gamers

The reputational damage inflicted on Britain by the uproar in the Gilts market last autumn is immeasurable.

At this month’s spring financial meetings in Washington, Chancellor Jeremy Hunt went all out to tell everyone ‘Britain is back’.

Now credit rating agency S&P Global has removed the ‘negative’ from UK government debt, which was added after Liz Truss’ mini budget. It restored its ‘AA’ rating and praised the end of ‘unfunded fiscal measures’.

One change that could be made is to waive the VAT charged to foreign visitors to the UK, which would be a huge benefit for luxury goods shopping at a time when London is losing out to Paris and Milan.

The failure of the Truss-Kwarteng government to have their amounts audited by the Office for Budget Responsibility (OBR) was a fundamental mistake and arrogant.

The scale of the market problem created was multiplied by the use of liability-based assets (LDIs) by pension providers, which without a £65bn bailout from the Bank of England would have caused a cascade of bankruptcies.

The Bank itself warned of a possible calamity on page 54 of its November 2018 Financial Stability Report.

Now, more than five years later, regulators are finally waking up to the idea that it was a mistake to use unreliable LDI-style derivatives to boost pension fund returns.

City regulator, the Financial Conduct Authority, has been in touch with asset managers demanding LDI portfolios become more resilient.

The Bank of England wants cash buffers – safety nets – that enable an increase in the return (interest rate) on British government bonds by 2.5 percentage points. This is a dramatic change from the pre-October 2022 position, when the bond stress level was just one point.

When the Bank discovered a gap in the supervision of LDIs in 2010, it noted that this was a matter for the Pension Supervisor. Needless to say, this sub-octane enforcer did nothing.

It has followed the Bank and FCA with ‘new guidelines’ for cash buffers, governance, operational responsibility and for trustees. The sound of large barn doors being closed can be heard.

Guidelines rather than formal rules seem weak. More importantly, there needs to be debate over whether LDIs should be banned altogether.

Using derivatives to boost the performance of gold-plated portfolios, the safest asset of pension funds, should not happen.

Sex, drugs and shame

The crisis at the CBI couldn’t be worse. An open letter from President Brian McBride expresses a “collective sense of shame” for the unacceptable behavior tolerated by the employer group. What is revealed goes far beyond the bewilderment of McBride and his team.

Personnel checks for ‘culturally toxic’ individuals during recruitment never took place. That is not good for an organization that preaches best practices.

More troubling is the freelance way complaints were handled. If a charge was filed against a board member, it was swept under the rug.

In one case, Human Resources, a supervisor and a board member were aware of an employee complaint regarding a senior manager and did nothing.

Law firm Fox Williams noted a limited amount of drug use – four cases were reported – but readily dismisses the notion of “widespread drug use.”

The CBI’s response is to propose raising the status of the head of HR to the board, in the hope that members will return.

The reality is there is no mood at the Treasury or in Whitehall to deal with a deeply scarred organization. And what good is a representative organization of the business community that lacks the confidence of members and government. It might as well dissolve now.

Crypto redux

After the collapse of the fraud-ridden crypto exchange FTX and the separate bankruptcy of Signature Bank, a crypto depository holder, one might think that bitcoin and other crypto had lost its luster.

Instead, it seems to have benefited from the uncertainty in conventional banking, with the price of bitcoin rising from a low of $16,500 last year to $30,000.

Behind the recovery is Britain’s Standard Chartered, which says the “crypto winter” is over and that the digital currency is heading towards $100,000 in 2024.

James Gorman, CEO of Morgan Stanley, has an increasingly different view of the value of bitcoin – ‘Zero’.