Hedging UK Government Risk

michaels

So DW and I are in the lucky position that about 67% of our retirement income will come from Govt/LGPS DB pension and state pension so fully index linked.

However this means we are majorly exposed to UK sovereign risk. If the UK ends up doing a Greece and being forced to slash pensions we are very exposed.

To hedge some of this risk our DC savings are in global trackers and I am moving the MMF to non-sterling denominated (not sure if this should be currency hedged or not)

But that still leaves the state pension/public sector pension risk. Is there any way to hedge this, some sort of bet on UK sovereign default but it would need to be triggered by a public pension default.
Has anyone looked into how to hedge this risk? Thanks

poseidon1

https://forums.moneysavingexpert.com/discussion/6684622/hedging-uk-government-risk

Doubtful anyone has ever seriously contemplated a Greece type economic meltdown happening here, that resulted in that country severely cutting state pensions in course of payment to its pensioners. For those unaware of what occured see below -

https://www.europeanpensions.net/ep/Greece-could-owe-pensioners-billions-after-historic-cuts-ruled-unlawful.php

https://www.bbc.co.uk/news/world-europe-33382046

Frankly, I would have thought it impossible to put together a meaningful hedge against deep cuts to civil service and LGPS pensions in the situation you outline, the cetv values of each are simply to large.

However as you say you can certainly try and insulate your DC funds from a potential UK sovereign default and resulting sterling collapse by holding non sterling denominated assets, gold (via etfs) and foreign currencies (interactive investors gives you that facility) and similarly with regard to general investment account investments.

SVaz

I have briefly considered what would happen if UK Gilts failed to pay out on maturity, but, on the balance of probability, if it happened it would mean something very serious like Civil war / Apocalypse so getting your money would be the least of our concerns, people would be killing each other for toilet roll ( only half joking) .

Linton

https://forums.moneysavingexpert.com/discussion/6684622/hedging-uk-government-risk

Your investments cannot cover you against every conceivable economic disaster. You have to accept that if your neighbours are all queueing at the soup kitchens you will be joining them.

Greece is very different to the UK as it is part of the Eurozone and so is subject to severe restraints. Essentially it is using a foreign currency for its internal economy, a Greek government debt becomes a problem for the whole Eurozone.

The UK, using its own currency, could not suffer a sovereign debt of that form. Its borrowing is denominated in £s and so it will always be able to return the money. The risk is that the £ would become seriously devalued against other currencies and so imports could be unaffordable. But this would affect everyone, not just pensioners.

Current investors would see some benefits if they hold global investments as they would increase in value in line with foreign currency.

PS - another thought: if you are worrying about these sort of events, hedging your foreign investments would be extremely foolish as the £s in which they are denominated will fall in value. Rather than following the £ you would want to hold the foreign currency as it becomes increasing valuable against the £.

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/82149494#Comment_82149494

I was thinking more in terms of a long and sustained collaspe in the sterling exchange rate akin to but worse than the position in the 1970s when UK had to ultimately go cap in hand for an IMF bail out loan.

It is the conditions attaching to such a loan which I believe could result in a UK government being forced to make the kind of pension benefit cuts inferred by @michaels' doomsday scenario.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82149464#Comment_82149464

Greece had been reporting an annual deficit of 3.7%, but it was revealed it was actually 12.7% ( later revised to 15.4%), and this is what triggered all the problems. Not just the extent of the debt, but the fact that it had been deliberately misreported by the Govt.

This sort of issue seems unlikely in the UK , especially with the OBR all over every budget with a fine toothcomb.

leosayer

https://forums.moneysavingexpert.com/discussion/comment/82149494#Comment_82149494

Great post.

This is the reason I hold global equity funds in unhedged form alongside gilts and gilt funds.

kempiejon

I have the majority of my SIPP investments in global stock and a small weight in global bonds, gold and debt using etfs. If the UK gets into the mire the problems might not be mitigated with asset allocation..

SO and I were chatting about making plans for societal collapse and so far the list for a go bag has space blanket, axe, lighter fluid and lighter, water purification tablets, 2 x army type ponchos and pain killers though looking for suggestions... Since Covid19 the cupboard under the stairs hold larger stocks of dried and tinned food, though I am considering adding shelf stable cooked grains in case of interruption in water supplies. Must buy a cross bow and machete.

michaels

I think the AI apolocalypse requires a lot of off grid acreage ideally with your own water and oil wells.

However I can see a plausible scenario where the capital.markwts are effectively closed to new UK debt issuance (don't forget the interest rate is a combination of risk free time premium and risk premium) and an increase in either component can lead to a debt spiral. I don't see the UK being able to go immediately to a zero external deficit so likely external emergency funding would be sought - and as with Greece this would entail haircuts for pensioners, not only state and public sector but also DC bail-ins.

Dead_keen

SO and I were chatting about making plans for societal collapse and so far the list for a go bag has space blanket, axe, lighter fluid and lighter, water purification tablets, 2 x army type ponchos and pain killers though looking for suggestions... Since Covid19 the cupboard under the stairs hold larger stocks of dried and tinned food, though I am considering adding shelf stable cooked grains in case of interruption in water supplies. Must buy a cross bow and machete.

A tin opener?

Linton

https://forums.moneysavingexpert.com/discussion/comment/82149508#Comment_82149508

At that time the £ was pegged against the $ and so in a similar position with the IMF as Greece was to the European financial authorities. Now the £ floats freely in the market, hence 1976 could not be repeated.