The head of Next has said the UK retailer warned the Bank of England that an investing strategy that plunged pension funds into crisis was a “time-bomb”.
“We are not exposed to liability-driven strategies despite multiple sales pitches and we have previously written to the Bank of England outlining our concerns about them,” Lord Simon Wolfson, who is a Conservative peer, said on Thursday.
He added that the practice of buying bonds that are then used as collateral for loans to purchase more bonds “always looked like a time bomb waiting to go off”.
The BoE on Wednesday outlined plans to buy up to £65bn of long-dated gilts in order to reduce their prices. Some pension funds had expressed concerns that margin calls against the loans secured by such bonds could threaten their solvency or induce forced selling of gilts.
The amount of liabilities held by UK pension funds that have been hedged with liability-driven investment (LDI) strategies has tripled in size to £1.5tn in the 10 years to 2020, according to the Investment Association. LDI strategies are designed to help pension fund clients match their liabilities with their assets, often using derivatives.
Wolfson said the strategies were “an extreme example” of a broader trend to eliminate all risk from pension funds.
Switching into safer bonds, as many funds have done over the past two decades, “reduces the volatility of the fund valuation, but our view is that in the long term it does not reduce the risk”.
Many funds that had gone into bonds “are actually taking a lot more risk than they thought they were”, he added.