Morning Line: Bank of England adds to the pensions chaos

The likely return of quantitative easing adds to the risks being borne by pension scheme members.

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by Deborah Hyde on Oct 07, 2010 at 12:50

Morning Line: Bank of England adds to the pensions chaos

While public sector staff are wading through the Hutton report on reform to their pensions the Bank of England seems increasingly ready to pump yet more money into the economy – a move that could scupper all plans to reduce the government’s liabilities.

Before we get all hot and bothered about the over endowed civil servants in their plush Whitehall offices let's remember that street cleaners and BT workers - indeed the majority of people with a pension in Britain - are relying on a defined benefit pension to keep them warm and fed in their later years.

Sure the number is falling as companies and the government realise that certainty about our future wealth is something we can ill afford and no-one doubted that workers in the public sector would inevitably have to contribute more in the future or give up on their gold-plated pensions altogether.

But while the dire state of government finances means reform of public sector pensions was inevitable it is unfortunate that the Bank of England is simultaneously - perhaps inadvertently - also forcing pension trustees to take on more risk.

Yesterday, Warren Buffet, one of the most famous investors in the world, added his voice to the chorus of people saying that you would have to be plain crazy to be buying bonds at the moment.

What he actually said was: 'It is quite clear that stocks are cheaper than bonds. I can't imagine anyone having bonds in their portfolio when they can own equities [shares].'

And even the Bank of England's governor Mervyn King has admitted that his decision to buy government bonds [gilts] in order to inject cash into the economy may not have done much to boost lending but has had a dramatic affect on the demand for shares as investors shy away from a potentially dangerous bubble in gilt prices.

But for the trustees of defined benefit pension schemes the news is worrying. They have traditionally been able to rely on bonds to help match their future liabilities. If the era of bonds is over there may be more problems ahead.

Already many schemes are shouldering huge deficits as retirees are living longer and their pensions cost much more than was ever anticipated. While trying to plug that hole the trustees also now have to try and predict the fallout from the Bank of England's 'quantitative easing' programme.

Sarah Deans, analyst at Citigroup, has repeatedly warned the policy is increasing pension fund liabilities because it is lowering bond yields [the rate of income they generate].

She calculates that falling gilt yields in the third quarter alone will have lifted pension liabilities by approximately 4.5%, suggesting yet more pain ahead if Monetary Policy Committee member Adam Posen wins over the other committee members and the printing presses start rolling again.

The Bank of England policy could also add more stress further out if, as some fear, the decision to overlook inflation now leads to much higher inflation in years to come.

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5 comments so far. Why not have your say?

"If the era of bonds is over there may be trouble ahaed" why might I ask.The reason why bonds have been going up and equities down is because institutional fund managers have been comparing returns against each other rather than providing a decent return for their clients. "I am sorry your pension pot has been halved Mr Smth but take heart from the fact that we were an upper quartile performer" in other words be grateful for what we have done for you. LOL. Buffet is right there are excellent quality stocks yielding far more than bonds it just takes a little bit of guts to veer away from the heard and a little bit of intelligence and research to spot the right stocks.

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Let's get real about equities. They are not for the man in the street, they are high risk investments.

The reason we are in the current mess is because of people who first did not care and later did not know what risks they were taking.

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The BOE and the FED are both going to start up the printing presses at max

speed - inflation will eventually get transmitted into all assets - houses and shares -but in the meantime if you've got any cash left (ie you are stupid enough to try and save) the politicians fully intend to steal the future buying power by creating more and more inflation, I would recommend gold, follow the herd !

(Pensions linked to CPI not RPI, cancellation of index linked stock sales by NSI -

our present politicians couldn't care less about people 'doing the right thing'

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"And even the Bank of England's governor Mervyn King has admitted that his decision to buy government bonds [gilts] in order to inject cash into the economy may not have done much to boost lending but has had a dramatic affect on the demand for shares as investors shy away from a potentially dangerous bubble in gilt prices."

I can see the gilts bubble, but where's the equity boom- the big shift of institutional money into shares?

Footsie puffing and panting all year to get 5% above where it was at the end of 2009. Still 20% lower than 11 years ago. Thin volume on the rallies. No big flotations in the pipeline after Ocado, And all this despite cash interest rates being a joke for well over a year too.

Some ordinary-shares bull market this is turning out to be. The big men seem as unenthusiastic as the little fellow cancelling his penny stock tipsheet subscription.

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Robin Linger

Oct 08, 2010 at 20:35

If the BOE wishes to give a quick stimulous to the economy, instead of QE money being used to purchase gilts and creating their own debts for the future, it would be much better if tthey purchased equities across the board with the emphasis on industrial and technology shares. This would not only encourage investment but help pension funds, and would be a far better arrangement than QE and the dividends from the investment would also help the nation at large.

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