Regulators at the heart of the pensions crisis as backlash builds
>
Regulators at the heart of the pension crisis: The backlash builds over the risky strategies that left Britain on the brink of financial crisis
<!–
<!–
<!–<!–
<!–
<!–
<!–
Regulators overseeing the pension sector were up to their necks with the risky strategies that brought Britain to the brink of a devastating financial crisis.
The Bank of England was forced to intervene last week to restore order as rising government bond yields left thousands of pension schemes in a liquidity crisis.
The meltdown was caused by pension funds using dangerous, high-risk products called liability-driven investment strategies — more commonly known in the city as LDIs.
Crisis release: Bank of England had to step in to restore order as rising government bond yields have left thousands of pension schemes facing liquidity crisis
Since then it has been found that:
- Britain’s largest pension fund bought LDIs, although members hadn’t said so;
- The fund – the Universities Superannuation Scheme (USS) – was led by Bill Galvin, the former head of The Pensions Regulator;
- The Pension Protection Fund, the lifeboat for pension schemes, was forced to raise £1.6 billion in cash as security for the use of the products;
- The Bank of England was also involved – its staff fund had invested more than £4bn in the asset class;
- The Pensions Regulator, the UK’s powerful watchdog, encouraged pension funds to buy LDIs.
The sheer scale of the establishment’s investment in these dangerous LDIs has raised questions about the regulation of the industry.
LDIs should protect pensions from sharp movements in interest rates – but their spectacular failure has baffled many at how embedded they have become.
The USS, the UK’s largest private pension scheme managing pensions for retired academics, has put billions of pounds into LDIs.
It used the products despite fierce opposition from some of its biggest backers, including Oxford and Cambridge Universities and Imperial College London.
“We believe that the increase in leverage during a period of high market volatility could potentially introduce significant risk into the system,” Cambridge, Oxford and Imperial College wrote in a letter earlier this year.
That ominous warning came out last week.
Pension bosses in the firing line
Bill Galvin
Bill Galvin became chief executive at USS in 2013, leading the push for LDIs. Before that, he was chief executive at The Pensions Regulator, the body that protects the nation’s pension pots.
He also worked at the Department of Work and Pensions, where he was responsible for drafting the policy framework for private pension protection.
Sarah Smart
The chairman of The Pensions Regulator was a major promoter of the dangerous plans that nearly blew up the financial system. Smart was hired last year and earns £73,840 in the lucrative two days a week job.
In a previous job with Standard Life, she controversially had a leadership role in ‘developing’ the LDI products. She has been accused by experts of a potential conflict of interest.
Labor MP Gareth Thomas said: ‘It is clear that the universities understood something that the wider market did not understand.
Why did an established fund like USS use these products? It is very worrying given the turbulent times we find ourselves in.’
USS was led by Galvin, a man who should have been fully aware of the pitfalls of such risky investments, having previously headed The Pensions Regulator.
Galvin resigned last week after leading the LDI investment strategy at USS.
He had pushed for greater use of LDIs and in February proposed increasing exposure from 35 percent to 52 percent of his portfolio.
Bernard Casey, pension economist and founder of the Social Economic Research think tank, said: ‘This is a classic example of poacher turned gamekeeper. He should have known better.’
The Bank of England pension fund had more than £4 billion invested in the asset class.
Even the £39bn Pension Protection Fund, the lifeboat for failing companies’ pension schemes, was forced to provide £1.6bn in cash as additional security for its connections to the investment products.
It is feared that other mainstream providers would also have used the products.
Thomas added: ‘This could be just the tip of the iceberg. If USS had gone for this in a big way, who would have done the same?
This can be widespread.’ The investigation of USS’s investment strategy comes as The Pensions Regulator – which should have protected the country’s nest eggs – is accused of promoting the controversial leverage schemes.
Clearly, the regulator has been directing pension funds to use LDIs and telling funds to lower their risk of major swings in the markets.
Sarah Smart, chair of The Pensions Regulator, previously held a job with insurance company Standard Life, where she developed and managed LDI products.
As a result, LDIs have become extremely popular. Pensions had invested £1.6 trillion in LDIs in 2021, up from £400 billion in 2011, data from trading group the Investment Association shows.