Edmund Truell: ditch gilts and embrace illiquids to plug DB hole

Speaking at Pensions and Benefits UK last week, Edmund Truell (pictured) questioned why the industry craves liquidity and said schemes should invest in more illiquid assets such as infrastructure.

It comes after 10-year gilt yields fell to all-time low of under 1% on 27 June just days after the Brexit vote, pushing up the total deficit of UK DB schemes to a record £935bn. With the sharp falls in sterling, inflation is expected to rise which will mean negative yields in real terms.

Truell, who is chairman of Disruptive Capital, told delegates: "You're losing money in real terms every year [from holding gilts] - over a long period of time that will erode the real value of your capital. If you start from a positon of underfunded, holding gilts safely guarantees the bankruptcy of that scheme. Your assets won't be able to keep up with the inflation-linked liabilities.

"Yet a whole body of regulation, actuarial advice and so on seems to be pushing more and more towards this safe guarantee of bankruptcy when most of you think you're bankrupt already. So it just doesn't work from my perspective."

When he asked the audience, around 90% agreed that UK pensions are bankrupt.

"How many people in this room can honestly say they're fully hedged against the impact of inflation, impact of interest rates and longevity? If you're not fully hedged against those three things you've got major, major risks and your liabilities could rise at a rate that outstrips even your wildest dreams in terms of asset returns."

Truell's solution is to first of all try to mitigate inflation and longevity risk and seek out long term return generating assets such as infrastructure. He challenged the need for liquidity.

"Why do we crave liquidity? We don't need liquidity, particularly if you've got an open fund in the public sector and contributions coming in. Firstly, I suggest doubling contributions or even tripling contributions to get them to around 50% of payroll and use them to provide the liquidity the fund needs.

"Secondly after holding a reasonable buffer of say three years' pension payments, put money into illiquid assets."

He also believes the UK's governance structure is not working and urged the regulator to take action.

"I'm concerned the people paying the checks such as the finance directors, shareholders and taxpayers have a very diffuse line of sight to the assets and liabilities and very diffuse accountability.

"[People say] that ‘you can't fetter the rights of the trustees - they are a separate body' and can safely fritter the money away through negative yields, consultancy fees and excessive manager fees. They can fritter money away by having the safety of liquidity. I'd re-invite the regulators to think very hard about how our pension funds are regulated and governed."

Truell headed up the LPFA for three years before leaving last September to advise former London Mayor Boris Johnson on pensions.

He spoke to PP in January about how public sector pension funds should be pooled.  

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• Topics
• Investment
• Defined Benefit
• Edmund Truell
• LPFA
• gilt yields
• LGPS