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UK pension fund values plunged by around £425bn in 2022 as bond market turmoil sparked by Liz Truss’s “mini” Budget led to forced asset selling by retirement schemes, according to a new regulatory analysis.
The extent of losses to pension funds in 2022, which equated to a near quarter drop in asset value over the year, was disclosed in a long-awaited report by the Pensions Regulator this week.
The House of Commons’ work and pensions select committee had asked the regulator to examine the impact of the September 2022 bond market crisis on thousands of corporate schemes using popular liability-driven investment (LDI) strategies.
“The fall in the value of gilts had significant impacts for pension schemes with ‘Liability Driven Investment (LDI)’ strategies, in particular, for those which had used leverage to increase their exposure to long term gilts,” said the regulator.
LDI strategies are used by “defined benefit” schemes to manage the volatility of their liabilities. They involve heavy purchases of government bonds but also the deployment of leverage, or borrowing, in the use of instruments such as gilt repurchase agreements.
When long-term gilt yields shot up to record levels in response to the then prime minister’s economic programme, pension schemes’ LDI hedges came unmoored, forcing them to dump hundreds of billions in assets to meet collateral calls. The sell-off only abated when the Bank of England intervened in the bond market.
The regulator estimated that the combined value of assets for 5,100 company defined benefit plans fell by around £425bn over 2022, from £1.79tn to £1.36tn — equivalent to a 24 per cent drop.
“This fall in assets is primarily due to the loss in value of gilts, corporate bonds and property,” said the regulator in its report released on Wednesday.
The report found that asset values hit their lowest point for 2022 in September of that year, indicating the effect of the “mini” Budget which was published that month.
However, the analysis also found that pension schemes ended 2022 in overall better financial health owing to their liabilities falling more steeply than the drop in asset values, as higher gilt yields reduced the cost of pension promises.
Liabilities fell in aggregate by 33 per cent, or around £575bn, in contrast to the 24 per cent drop in asset values.
However, the regulator said the “true impact” of the gilt market crisis “will not be known in full for several years” after each scheme had done a formal valuation of their finances.
Iain Clacher, a professor at Leeds University Business School who gave evidence to the work and pensions committee, said the report “shows just how significant the impacts of the LDI crisis were”.
“As TPR have acknowledged that they won’t know the full extent of this until scheme returns come in, this suggests that this number is likely to be higher once everything is known.”
