ALEX BRUMMER: First aid for our pensions after the LDI disaster

Liz Truss complains in her mea culpa that when the tax cutting mini-Budget was unveiled in September, no one at the Treasury cautioned her that the package could have a devastating impact on defined salary pension funds.

There was good reason for this. Neither the Treasury nor the Bank of England was alert enough to think that liability driven investments (LDIs), borrowing against British government bonds in complex derivatives market, was a risk to stability.

The Bank’s most detailed discussion on LDIs took place in 2018 in the remote reaches of a Financial Stability Report. It proposed regulatory interventions, none of which ever took place. 

As a consequence, when the gilts market shuddered in the wake of the mini-Budget, it came close to bringing Britain’s pension system tumbling down. 

It is extraordinary that the Bank and other regulators ever allowed gilts to be used in highly risky derivative strategies, undermining the lifetime savings of ordinary citizens.

Five months on, some of the nation’s most significant pension advisers – Barnett Waddingham and XPS Pensions – have determined that enough is enough and have cut their ratings on some pooled LDIs to their lowest level. They have ruled that gambling with people’s retirement funds is unsafe.

This is a reminder of how the credit ratings agencies, which had no problem with sliced and diced dodgy mortgages before the great financial crisis of 2007-09, rapidly changed direction afterwards. 

Pension advisers and managers should now have had no truck with the quick fix for deficits, which LDIs offered in the first place.

The Commons probe into the meltdown is ongoing but it was evident from the start that regulators, and those who marketed LDIs, had no idea of the risk.

BlackRock, along with Insight Management and Legal & General, disputes the findings of the advisers. 

It is almost certainly true that as the bigger operators in the LDI market they were less exposed to the 1.6 percentage point blow-out in bond yields and could manage the calls for more collateral. 

No one should ever think that allowing gilt edged stock to be transformed into a high-risk asset class was ever a sound idea.

Family affair

Who even knew outside investors could buy shares in the most garlanded name in banking Rothschild & Co?

Some seven generations after the bank helped finance the Duke of Wellington’s victory at Waterloo, the head of the clan Alexandre de Rothschild, son of Baron David, is seeking to consolidate ownership.

The path of public-to-private is well ploughed. The Rothermere/Harmsworth family, publishers of the Daily Mail, went through much the same process last year.

Family dynasties, anxious to protect a gilded heritage, do not need to expose themselves to the uncertainties and costs of the stock market – unless there is call for fresh equity. 

Unlike many of the investment banks, Rothschild doesn’t have a trading arm and is mainly an advisory and wealth/asset management operation, so does not need boundless new capital. 

The tidying up of ownership began under Baron David when he brought together NM Rothschild in London (principally the creation of his late cousin Sir Evelyn) and the French arm under the umbrella of the quoted French vehicle Concordia.

Under the current plan to go private, some 15.6pc of the shares, loosely owned by family members, would be mopped up alongside stock held by outsiders. 

There is likely to be some agitation from the minority about price. Rothschild has long traded at a substantial discount to peers such as Lazard. There is always room for a sweetener.

The next target, presumably, might be to bring estranged Swiss private bank Edmond de Rothschild into the fold.

There is a time for everything…

Gilded future

Gold is still regarded as a safe haven, as we learnt at the start of Russia’s war on Ukraine when it was revealed some £110billion of Kremlin reserves are held in bullion.

US-based Newmont, as the world’s biggest gold producer, is anxious to be reunited with its former Aussie exploration arm Newcrest and has taken the opportunity presented by a leadership hiatus to launch a £14billion offer. 

The bid price is seen as lukewarm so it wouldn’t be surprising to see Toronto-based Barrick enter the fray.

The opening move, on a gilded chessboard, has been made.