Pensions: September Monthly Overview

By Andrew Adie and Gareth Jones

Another month, another crisis. In the seemingly unending spiral of bad news, September threw up a wide range of issues, new risk factors and policy calculations that are going to keep trustees and their advisors busy for the rest of this year, and beyond.

At the beginning of the month, we considered what impact the new prime minister, Liz Truss, would have on the pensions industry, particularly her ‘bold measures on macro-economic policy’ and her “unashamedly pro-growth” agenda. By the end of the month, we got our answer. Last week, the headlines focused on the collapse in the price of gilts, driven by the Government’s ‘fiscal event’ which spooked markets, saw a drop in the value of the pound and increased the inflationary pressures facing the UK.

Plunging gilt values

In that mix, defined benefit (DB) pension schemes found themselves facing a range of issues including unexpected cash calls as plunging gilt values led liability driven investment managers to demand more collateral from schemes, putting them in a position of being distressed sellers of assets in a depressed and falling market.

Emergency intervention from the Bank of England (BoE) and an announcement that it would be buying £65 billion in long-dated gilts has calmed the situation and, according to analysis from PwC, may have improved the funding position of some schemes. That analysis suggests that the UK’s 5,200 DB schemes were (as of Friday 30th September) in aggregate surplus of £155 billion (vs a surplus of £60 billion at the ed of August).

Some schemes will also be benefitting from increased yields from gilts, but many will also be concerned about what the economic turmoil means for the strength of the economy and the health of sponsoring companies. Equally the stock market, gilt values and currency markets look likely to endure a bumpy ride for the rest of this year.

That significantly increases the levels of risk that pension schemes are having to face and, given that schemes felt they had to approach the BoE and ask for intervention in the face of the collapsing gilt market, it sets a framework for ongoing enhanced engagement between schemes and regulators to ensure financial stability is maintained.

Political risk for pension trustees

The other risk factor that has emerged in September, and which requires consideration from pension scheme trustees is political risk. We now have a more radical Conservative Government which has shown it is willing to introduce new policies, without much engagement with the City or the pensions industry (or indeed with the Office for Budgetary Responsibility). The new Secretary of State for Work and Pensions, Chloe Smith, and the new Pensions Minister, Alex Burghart will also be getting to grips with their new briefs and there will be questions about whether they will pursue similar policy objectives to their predecessors (notably Guy Opperman, who was a big proponent of the ESG agenda). The Work and Pensions Select Committee have also indicated they will scrutinise issues related to events over the past week, including the use of liability-driven investments (LDIs). The events of September will have given an early lesson that engagement and careful communication is required, but that doesn’t mean it’s going to change the Government’s agenda or its desire to balance the books through a growth driven economic ideology.

While this week has seen the headline grabbing U-turn from Kwasi Kwarteng to drop the 45p tax cut, in reality this element of the ‘fiscal event’ was relatively small in financial impact, even though it had a far greater symbolic significance. While the Government has dropped that contentious element of its policy the rest remains and we have until the 23 November for the Government’s next fiscal announcement, with the much-anticipated calculations on departmental cost cutting and an explanation of how elements like energy price relief and tax cuts that remain (such as dropping National Insurance rises) will be paid for and received by the markets.

In conjunction with a more radical Government, we have a revitalised official opposition, with Labour moving back to the centre ground and with opinion polls suggesting they are now more electable than they have been for some time. With a General Election having to be held no later than end of January 2025 pension trustees also need to factor this into their risk calculations and ensure they have the connections and contacts they need to a political world that is also changing.

Turbulence in ESG

September also saw turbulence in ESG which trustees need to be aware of. In the US a group of Republican senators, led by Senator Pat Toomey (ranking member of the Senate Committee on Banking, Housing and Urban Affairs) wrote to some of the largest ratings agencies demanding they give details of the methodologies they use to assess ESG ratings for businesses. The move is the latest development in a spreading scrutiny of ESG investing by Republican politicians.

Blackrock has defended its stance on ESG after 19 Republican state attorneys accused it of placing ‘activism’ ahead of fiduciary duty by investing using ESG metrics, which the politicians say is risking the returns for State Pension Funds (which won’t be able to invest in SIN stocks and equities that don’t fit ESG criteria). It follows an ongoing campaign from the State Financial Officers Foundation that is calling for State pension schemes assets to be withdrawn from funds that won’t invest in fossil fuels. Given that fossil-fuels companies are seeing record returns and rising share prices the argument is that by failing to invest in them, ESG-focused fund managers are risking the returns for pensioners – and thus State Pension Funds are accused of failing to deliver their fiduciary duty by allowing ESG investing criteria to be used.

Blackrock has reiterated its belief that climate change poses a significant risk for investors and that assessing investments using ESG criteria reflects shareholder votes. While this debate is focused on the USA at present it is sending shock waves through global fund managers. While there is no indication yet that this debate will see a rowing back on ESG investment criteria and philosophies, it is likely to continue to fuel activism and debate from those who think that ESG investing is denying individuals and institutions the opportunity to chase growth in SIN stocks and fossil fuels.

The upshot from all of this is that pension schemes need to have all their antenna raised in an environment that is recalibrating risk calculations and bringing new issues to the fore, and that is before we start considering the impact of the cost of living and potential recession on scheme members’ income and appetite to retire (for those who are still active members of schemes).

It does suggest that trustees need to maintain a policy of active engagement with political stakeholders and ensure that their views and role in society are broadly understood to avoid miscalculations from any stakeholders who may not have the needs of pension schemes at front-and-centre of their thinking.

If you would like any specific communications advice relating to any of these issues, do get in touch. pensions@secnewgate.co.uk