Pension funds losses hit ‘staggering’ £626bn
‘Gold-plated’ final salary pension schemes have incurred massive losses of £626 billion, revealing the significant impact of controversial investment strategies that nearly caused a meltdown last year.
Data from the Office for National Statistics indicates that the value of private sector defined benefit plans, which guarantee a pension based on a worker’s pre-retirement salary, dropped by nearly a third from over £2 trillion at the beginning of 2022 to less than £1.4 trillion by the end of March.
The decline gained momentum after the price of government bonds (gilts) sharply decreased following former Prime Minister Liz Truss’s mini-Budget a year ago. As a result, the Bank of England had to provide a £19 billion bailout to the pensions sector.
Private sector final salary pension schemes have mostly closed due to being unaffordable for employers. Traditionally, these schemes heavily invested in UK shares. However, they recently adopted controversial Liability Driven Investment (LDI) strategies based on gilts, which were considered low risk.
This approach backfired when the LDI funds they used were forced to sell assets at a loss due to the revelation of hidden borrowing in the pensions system during the crisis.
Cliff edge: The value of private sector defined benefit plans fell almost a third from more than £2trillion at the start of 2022 to less than £1.4trillion at the end of March
‘£600 billion is a staggering sum,’ remarked Iain Clacher, a pensions professor at Leeds University. ‘Nobody has been held accountable for the regime that got us here.’
Despite the losses, overall funding levels have improved as the estimated obligation to pensioners, linked to the price of gilts, has decreased more rapidly than their assets.
‘One year on, pension funds are generally smaller in asset terms, and their funding levels are mostly above 100 per cent,’ said Aoifinn Devitt at wealth manager Moneta. However, she cautioned that schemes continue to invest heavily in gilts and avoid shares, potentially contributing to the poor performance of the FTSE index this year.
Rachael Healey at law firm RPC stated that lessons had been learned from the LDI debacle, asserting that they are better understood now than a year ago. She added that if a similar crisis were to occur again, pension
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