The Big DB Pensions Asset Reshuffle

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The scale of the big UK DB pensions asset reshuffle of 2022.

I was wondering, can we use public data to get a rough handle on numbers and scale of the asset movements triggered by recent market events on a rainy Sunday? I think we can.

Summary

🔄£270-380BN asset flow needed to rebalance (workings below). The UK DB sector is overall in a good funded position but these are BIG numbers, even in the context of global markets and asset flows (a lot of managers will see outflows in the multiple tens of billions).

That’s in the context of the following topline changes for UK DB funds in 2022

PV Liabilities (on PPF basis )⬇️ 600bn
PV Liabs (on buyout basis) ~ ⬇️⬇️ 802bn
LDI asset value ⬇️ 560bn (bonds + derivatives) 

Tl; dr –

DB pension funds had assets fall by ~£500bn, and ended up better off overall / on avg

Because liabilities fell by the same or more

But, rebalancing asset allocations is big challenge

Hundreds of billions have moved / are moving 

Workings –

Comparing 31 Dec 2021 to 30 Sep 2022 using data from the PPF index and Purple Book and with a few estimations …

Some observations:

LDI assets value falls by 556bn from 900bn to 344bn (mix of bonds & derivatives )

Buyout liabilities down ~£800bn

Buyout funding 86% -> 100%

**THE** big question now is : how to get back to prior strategic weights & leverage

Schemes will need to de-lever their LDI (possibly at lower hedging levels but either way that requires an asset flow into LDI from growth assets )

Asset flow needed 270-380bn from other stuff into LDI, where might that come from?

Equity
Alternatives
“Other”
Property

All possible but 270-380bn is significant vs total holdings in growthy assets of ~610bn (of which a decent chunk will be illiquid, so we’re talking a high percentage of the liquid stuff, here’s roughly what aggregate DB holdings probably look like this year

If you’re a manager running growth funds with monthly dealing or better, you probably know this already

Loads of managers will have seen / are seeing outflows totalling in the multiple tens of billions

This has been going on last 3-4 months & continuing 

Note: equities held mainly global these days . So flows less impactful than if it was UK . Perhaps supportive of GBP?

GBP weakness will have supported values of other assets

TPR asset data has “hedge funds”, suspect this is prob mainly multi-asset funds, active credit etc 

Some of “other” will be illiquids so can’t move in short / medium term 

How does the LDI performance break down?

With 900bn held in bonds (start of year), 645bn of exposure through derivatives (~85% total hedging level)

Performance in 2022 approx

Bonds ⬇️ 324bn
Derivatives ⬇️ 232bn

(Remember that’s in context of buyout liabilities ⬇️800bn) 

So I think the “JP Morgan number” was prob on the low side

LOTs of approximations involved here and things that don’t tie up 100% perfectly

The aggregated data is just pretty imperfect

Trying to aggregate 5,000 schemes always gonna be like that

Some individual schemes could be in v different positions 

What do you think I’ve got wrong / missed ?

(I’ve already thought of a couple adjustments I’d like to make ) 

Source data: PPF index data and purple book for allocations ( as at last year )

Lots of caveats around their 30 Sep 2022 figures – states they don’t have the data to know asset value exactly – doesn’t take into acct any hedging reductions

Sources – *PPF 7800 index The PPF 7800 index | Pension Protection Fund

**Purple Book 2021 The Purple Book 2021 | Pension Protection Fund

*** LCP data Feb 2022 Chart Your Own Course 2022

**** TPR note committees.parliament.uk/publications/3…

thepensionsregulator.gov.uk/-/media/thepen…

And now – coffee


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