Kwasi Kwarteng’s Budget fire sale has cost pensions £75bn

The fire sale of former Chancellor Kwasi Kwarteng’s Budget has cost pensions £75bn, according to a report by a US investment bank

According to a report by a US investment bank, the near collapse of the pension market that led to a Bank of England bailout has already cost companies’ pension plans up to £75 billion.

The massive loss of value reflects the exposure of many private pension funds to commitment-based investment strategies. They use LDIs to ensure they can make future payments to ten million participants in final pay plans, which pay guaranteed pensions based on employees’ wages at retirement.

LDIs use leverage – or borrowing – to increase the yield of government bonds, known as gilts.

Fire sale: Many funds were released after former Chancellor Kwasi Kwarteng's disastrous mini-budget sparked an unprecedented sell-off in September

Fire sale: Many funds were released after former Chancellor Kwasi Kwarteng’s disastrous mini-budget sparked an unprecedented sell-off in September

But many funds were stalled after former Chancellor Kwasi Kwarteng’s disastrous mini-budget led to an unprecedented sell-off in September. JPMorgan estimates that the fire sale of assets has cost pension funds between £65bn and £75bn since August alone. That equates to total assets of £1.7 trillion at the start of this year.

The estimates are based on the bank’s forecast for figures expected this week from the Pension Protection Fund, the safety net for the interests of some 5,200 final-pay funds.

But the final cost will likely be much higher. “We think about 25 percent of the assets have been lost,” said Iain Clacher, a professor of pensions at the University of Leeds.

Supermarket group Sainsbury’s revealed last week that it had made a £500 million loan available to its fund to prevent an asset fire. The pension fund had already fallen 30 percent to £8.2bn in the year before the LDI market exploded.

The BT pension fund, which has increased its LDI use in recent years, says it has lost £11 billion in the turmoil. The telecom giant’s fund has fallen by more than £21 billion since June 2021 as a result of its LDI strategies. BT defended the use of LDIs this weekend. “During this period, the liability hedging assets performed as intended. They have decreased in value in line with a decrease in the present value of our future obligation to pay pensions,” it said.

‘As a result, there was no deterioration in the financing position.’