This week marks the one-year anniversary of the Bank of England being forced to intervene to stabilise the gilts market, after former Chancellor Kwasi Kwarteng’s unfunded tax cuts rocked the UK’s financial markets, causing gilt yields to soar and prices to fall.
Notably, it also brought down the Premiership of Liz Truss, mere weeks after being ‘appointed’ to the role, and fuelled a negative (or laughable – depending on your view) image of the U.K. abroad. No one will forget that a lettuce outlasted a Prime Minister.
Adding to the concern was that it was a crisis in what was supposed to be a relatively stable area of the investment market, UK government debt, and it shocked everyone. For the first time, in my memory at least, terms like ‘Defined Benefit pension funds’ and ‘Liability Driven Investing (LDI)’ were the lead story in the nationals and on Channel 4 news every night.
As those weeks unfolded, they had huge consequences – and many are still feeling the impact. From those renegotiating their mortgages at the worst possible time, through to many closed DB schemes being that much closer to buyout than ever before, limiting appetite even further for riskier (equities) or more illiquid (infrastructure) assets.
And yet, whilst it wasn’t widely talked about publicly, the issue wasn’t entirely out of the blue either. I recall having conversations months before the crisis, where several people cited concerns over big movements in bond yields, what that meant for pension schemes, in some case concerns even with regards to over-leveraged LDI, and the fact that the consequences of all this were not being fully discussed in the market.
It turns out that these topics, particularly the issue of rates and collateral buffers, were already coming up in conversations with many pension schemes over the Summer, and whilst they couldn’t have foreseen the sheer scale of the problem that eventually unfolded, perhaps it wasn’t entirely a ‘black swan’ event.
It was notable at the time that relatively few organisations were willing to discuss – publicly – what was happening and the reasons for it, save for those on the periphery of the crisis.
There is, of course, a delicate balance to strike in the midst of such an event, to avoid simply stoking the embers. It was only a few months ago that the Chairman of the Saudi National Bank, Ammar Al Khudairy, ruled out providing further funding for embattled Swiss bank, Credit Suisse, during a live TV interview. The shares went into freefall, prompting the takeover by UBS just four days later. Within weeks, Al Khudairy had also resigned.
If there are broader lessons we can learn, perhaps one of them is the imperative of remaining close to those at the coal face of a business, to better understand the key concerns impacting on the company, and importantly on clients. A good communications strategy can’t halt a crisis – but sometimes it can provide an opportunity to pre-empt an issue and consider what can and can’t be said.