Liz Truss’ mini-budget helped knock £425bn off pension funds’ assets in 2022
Pension funds saw their valuations plunge by nearly a quarter in 2022, partly due to the bond market turmoil that followed Liz Truss’s mini budget, new research suggests.
According to a new report from the Pensions Regulator, the value of assets held by pension funds fell by around £425bn over 2022, equivalent to a 24 per cent fall in the overall value of scheme assets.
“This fall in assets is primarily due to the loss in value of gilts, corporate bonds and property,” the report said.
Asset values hit their lowest point in September, pointing to the impact of Truss’s fiscal event.
Pension funds were hit hard after the government announced tens of millions in unfunded tax cuts, which spooked the bond market.
The value of gilts dropped sharply, impacting pension schemes using so-called Liability Driven Investment (LDI) strategies.
LDI aims to reduce volatility in scheme funding levels by investing in assets whose value moves in the same direction as that of the scheme’s liabilities. In practice this means LDI funds invest heavily in long term gilts.
A number of funds used leverage to increase their exposure to gilts. However, the sharp fall in gilt values led to large collateral calls from the leveraged LDI investment managers to meet the loss in value.
Fund managers dumped gilts to meet those calls, which only sent gilt values tumbling lower. The crisis only abated when the Bank of England was forced to step in to address the panic.
Despite the sharp fall, pension funds actually saw an improvement in their overall funding level of around 15 per cent in the course of the year.
“The primary reason for the improvement in funding levels is due to the fall in the value of liabilities exceeding that of the value of assets,” the Pensions Regulator noted. Liabilities fell by around a third of 2022, reflecting higher gilt yields.