This thread is a twisted trainwreck but still not as ugly as the contortions on UK sunday politics shows this morning!
Still feels like there is some 101 that needs explaining here...
DB schemes are underfunded precisely because of low interest rates. In general nothing could be better for the schemes, and all long term insurers, than rates rising. If managers had invested all their funds in ultra low yielding long dated instruments (say 50 year gilts) over the last 15 years the hole would be waaay deeper and also permanently locked in. Yes you can say that the companies who made the DB commitments should cover the gap, but a gap of that scale would bankrupt many of those companies or at the very least cripple them, reduce jobs, investment, growth prospects, blah blah.
Clearly full blown Sarsi-nomics doesnt sound good then... So Mr Prudent Pension Manager starts off (let's say in 2009) by putting 80% in bonds and 20% in stocks, hoping that in the long terms his stocks will flourish and close the gap. Note that we are already at the “casino” here...
Rates stay low... this isn't working out. Yes my stocks are growing but I'm still making less than 2% on 80% of the fund when I need 5-6% on the total on a sustained basis to be anywhere near meeting my future liabilities. Mr Prudent Pension manager gets fired. A new whizkid steps up shouting about private equity opportunities and 10%+ returns. But there's no cash to buy them. If I just sell bonds I'm creating a massive mismatch between my rate sensitive liabilities and my assets (where only the bonds component can be relied upon to move the same way as the liabilities when rate move). Regulator won't let that happen, and with good reason.
A pinstriped man walks in with a PowerPoint on derivatives. Turns out we can have all the matched rate exposure we need, but only need half as much tied up in the invested position. Sure, there's some fine print about margin calls but we've run the scenarios and unless some sort of twisted Dr Who baddie gets into power and decides to blow up the economy with a kamikaze chancellor sidekick then its all good. The risk managers mumble something about Brexit and political risk, but then watch TV and hear Teresa May saying Strong and Stable. Seems OK. Signed off.
Half the bonds get sold, we load up on private equity, and away we go. Whizzkid is telling us we have make 20% returns each year on the PE and started closing our funding gap. Everyone is happy.
Turns out a red white and blue brexit wasn't a thing after all...
Pandemic! Rates tumble even further.
Oh dear, Boris had a beer in his garden....
Kami-kwasi does his thing...
Once chaos averted, Mr Prudent Pensions Manager gets rehired and buys bonds yielding 6%. Happily his liabilities have also now come down in value thanks to higher rates, and he's now well matched. Everyone goes to the golf course... (until that illiquid private equity portfolio actually has to pony up some real cash in 2040 and prove the fair values the whizzkid has been reporting...).