How Could So Much Pension Leverage in the UK Lurk Unseen?
The UK market crisis exposed hidden risk in the financial system — derivatives in pension funds. Why did voluminous pension disclosures miss it?
UK pension plans were gambling more than people realized.
Photographer: Angus Mordant/BloombergWe might never have known about the full extent of the leverage hiding in British corporate pensions were it not for the crisis that followed last month’s much-pilloried “mini” budget proposed by UK Chancellor of the Exchequer Kwasi Kwarteng. Leverage need not be a problem if it’s properly managed. But it needs the disinfectant of sunlight.
Contractual pension promises are really a form of debt: The employer owes the employees a sum in the future. The snag is that this obligation is a moving target. It rises with long-run inflation expectations, as retirees’ incomes are typically linked in some way to consumer prices. It also jumps with advances in longevity as pensions then have to be paid for longer. And there is some subjectivity in how you put a present-day value on a payment to be made in, say, 2045.