There are plenty of problems faced by pensions and long-term saving

Even a cursory glance at the news will tell you that there is a lot of rumbling discontent in the pensions arena. There has been the issue over NHS doctors pensions, the WASPI women and today a strike over pensions by those who work at universities. I rarely directly dealt with them as they were a colleagues responsibility but back in the day the Universities Superannuation Scheme had a very good name. In many ways these are symptoms of credit crunch themes so let us take a look at them. But our musical theme is provided by Queen and David Bowie.

This is ourselves under pressure
Under pressure

Low and negative interest-rates

Pressure was applied by the initial cuts to official interest-rates but this was ramped up when the bond purchases of QE were added to it. This was a deliberate attempt to reduce bond yields which in many ways are the lifeblood of many types of pension.As ever we were promised it would be temporary as this from Bank of England Deputy Governor Sir Charles Bean from September 2010 shows.

 “It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.”

I am afraid that he took us for Charlies back then as over nine years later we are still waiting and as I shall explain in a moment matters deteriorated. As to Sir Charles he is “doing very well” as not only did he retire with a large Bank of England pension that somehow managed to be fixed to the “flawed” RPI measure of inflation but he is now at the Office for Budget Responsibility.

If we moved forwards to August 2012 our warning klaxon was triggered as we saw an official denial.

For those approaching retirement in ‘defined contribution’ schemes, lower gilt yields as a result of QE have
reduced annuity rates. But it is crucial to allow for the fact the QE has raised the value of pension fund assets too. Once allowance is made for that, QE is estimated to have had a broadly neutral impact on the value of the annuity income that can be purchased from a typical personal pension pot invested in a mixture of bonds and equities.

There always were issues with that an even it could not avoid pointing out this.

But schemes that were already in substantial deficit before
the financial crisis are likely to have seen those deficits increased.

Also the deflector screens were in operation which is a bit odd don;t you think when there is apparently no problem.

The paper notes that the main factor behind increased pension deficits and falls in annuity incomes has not
been the Bank’s asset purchases, but rather the fall in equity prices relative to government bond prices.

If we look at their last point this remains true and is much of the problem. The UK FTSE 100 has gained over 1600 points since August 2012 according to my monthly chart but the 50-year Gilt yield has plunged from 3.09% to 1.18%. So what we were told was temporary has become permanent. Regular readers will be aware of the bond market surge we have seen and in fact it was even stronger a couple of months ago when the UK 50 year yield went below 1% for a time.

The Problem

Let me now address the consequence of this which twofold. If you have a pension fund to invest in and draw from ( DC or Direct Contribution) then your annuity rate and hence pension will be low. Added to the bit that allows for the risk of you dying ( sorry for the grim bit) is a mere 1% or so. So whilst you can take 25% as a lump sum and it is tax-free the other 75% does not pay much. A single life annuity at 65 pays just over 5% so many will doubt if they will even get the sum invested back and this is with no inflation protection.

Next comes another development which has hammered final salary or Defined Benefit schemes.The trends were against them as we have looked at above but it got worse as some investors noted that you got get more yield from RPI linked Gilts than conventional ones and drove the prices even higher. This meant that the costs of a DB scheme got higher/worse and meant they were likely to continue to thin out in number.

You do not have to take my word for it as here is the Bank of England.Remember it saying in 2012 that things were neutral? Well by 2016 apparently not.

It has emerged that employees, led by the Bank’s governor, Mark Carney, received the equivalent of a 50%-plus salary contribution into their pensions last year, underwritten by the taxpayer.  ( The Guardian )

Pensions Law

Back in the days before the credit crunch I was involved in some pensions work and took the advanced qualification called AF3. I stopped because they kept changing the rules and it would have been a case of perpetual study! But even more seriously the rule changes have tripped over each other and ended in the mess that is doctors pensions. Most would want them to be covered but as the limits were cut no-one seemed to think that it could cost consultants to work for the NHS. As fast as they earned money this raised their pension value and they were/are taxed on it.

NHS England has set out plans to pay off pension tax bills for doctors who breach the annual allowance limit on pension growth in 2019/20. ( GP Online)

So there is an apparent fix but what about others who have been tripped up by changes which have turned out to be in some senses retrospective? I suspect professors are part of the USS dispute although what we have looked at already is an issue.


This is a problem because of the way that they are measured.

The pensions industry uses something called a ’discount rate’ to calculate the present value of the
scheme’s liabilities………….. The liabilities must be measured using the current yield on high quality
corporate bonds – usually AA rated bonds – regardless of how the how the trustees of the pension
scheme invest their assets

What do you think has happened here in the credit crunch era?


The arrow flying into the heart of pension saving has been the persistence of low interest-rates and bond yields.They have been not only “temporarily” low for a decade but have gone even lower. Buying an index-linked Gilt now guarantees you a negative real yield if you make a long-term investment which frankly defeats its/their whole purpose.

If we switch to the WASPI issue there is another mess. Back in the early to mid 1990s it was decided that men’s and women’s state pension ages would be equalised rather than women getting theirs at 60 as opposed to 65. In many ways it seemed fair although of course some would be adversely affected.This was sped up in 2011 but has been a policy in motion under governments including all 3 main parties in the UK. Was this unfair? If so it is hard to see how changes could be made and also what about higher retirement ages generally? Even worse plans to change this seem to mostly benefit the better off. So I have tried to avoid the politics but yet again we end up with short-term manoeuvring around a long-term issue.





Carillion highlights the many problems of credit crunch era pension financing

This morning’s news brings us back to a problem which has dogged the credit crunch era. The advent of first official interest-rate cuts and then central bank balance sheet expansion was designed to pull economic demand from the future to the present. This poses an issue for pensions as it does for all long-term savings contracts as they rely on the future. The issue has become clearest when we look at a consequence of the widespread monetary easing which was reflected in a question on Thursday to ECB ( European Central Bank) President Mario Draghi which mentioned “10 Trillion” dollars of negative yielding bonds. If you start doing any sort of maths you find that the negative yields imply you will be getting less back in the future than you pay in now and that is before you factor in the impact of inflation. Who invests to make a loss?

Putting it another way here are the real yields as of today from Germany. Not what economics 101 would predict for am economy in a boom is it?

Just for clarity some of the nominal yields are negative as shown in the chart but even when they go positive they are negative if we allow for inflation prospects and estimate a real yield.


This reflects the conceptual issue as we note that its business model was to take advantage of the era of monetary easing. Take a look at this from the House of Commons Briefing Paper.

Over the eight years from December 2009 to January 2018, the total owed by Carillion in loans increased from £242 million to an estimated £1.3 billion – more than five times the value at the beginning of the decade.

So it was able to borrow on a large-scale as we note an effect of these times which is often forgotten. Not only did it become cheaper to borrow for many purposes but there was an availability of credit meaning that Carillion could borrow ever more as well as cheaply. As an aside the banks would no doubt have been happy to make some business lending but as I reported many years ago now about Japan you don’t always get the sort of business lending you want as we note what it did with it.

In the eight years from 2009 to 2016, Carillion paid out £554 million in dividends, almost as much as the cash it made from operations. In the five years from 2012 to 2016, Carillion paid out £217 million more in dividends than it generated in cash from its operations.

Now let us skip to the pensions situation.

Carillion has 13 UK defined benefit pension schemes with 27,000 members. In January 2018, the trustees estimated that the schemes’ Pension Protection Fund (PPF) deficit (the shortfall compared to what is needed to pay PPF compensation levels) was up to £900 million

So shareholders got dividends and we know the directors were well paid and were able to think of the future. From the Financial Times.

Allowing clawback conditions to be changed a year ago, striking out corporate failure as a reason to take back bonuses.

Yet they were somewhat more forgetful about the futures of others.

When did this start?

Rather concerningly the problems were long-standing. From Josephine Cumbo in the Financial Times.

In written evidence to the Committee, Robin Ellison, chair of Carillion pension scheme trustees, said the trustees had tried to agree higher funding contributions from the company in 2008, 2011 and 2013.

Even worse there are higher estimates of the problem emerging from the woodwork.

In his letter to the committee, Mr Ellison revealed that the funding shortfall for five of the six Carillion pension funds he chairs widened from £508m in 2013 to around £990m in 2016 when measured on a “technical provisions” basis. This is the measure used to set contributions from the employer every three years. However, the “buyout” deficit, or the measure used by the Pension Protection Fund to value a creditor claim for the pension debt, is nearer £2bn according to Mr Ellison.

This brings us to the subject of the regulator as we wonder what it has been doing over the past decade?

On Monday, the Work and Pensions Select Committee published new evidence claiming that the Pension Regulator (TPR) was alerted to problems with the company’s main pension plans as long ago as in 2008, when the scheme’s trustees and the company were locked in a funding dispute.

We seem to be back to the issue of who regulates the regulators as this looks like the behaviour of yet another paper tiger.

What is a pensions deficit?

In theory this is easy as it is simply an expected future shortfall. The problem is that more than a few variables are unknowable such as investment returns, inflation and interest-rates and yields in the future. The modern era started in 1997 with the Minimum Funding Requirement which had an impact on the markets I was working in/on at the time. From HM Parliament.

it appears to have created some extra demand in the long end of the gilts market, which may have contributed to the depression of yields.

This led to the view that one of the aims of the MFR was to support the Gilt market. Then another issue arose which has continued which is the use of yields to value pensions as only a year later there was a big change for dividend yields in pension funds.

the dividend yield is no longer a reliable measure of “value” for UK equities – this is partly due to the abolition of tax credits on UK dividends in the July 1997 Budget, which
has changed companies’ behaviour over profit distribution, and partly because investors are willing to value shares on future long-term expectations, despite the
absence of dividends or profits

More recently we have seen corporate bond yields used for pension deficits but this has brought its own problems as central banks have intervened here. Firstly by making them more attractive by cutting interest-rates then reinforcing it via balance sheet expansion via bond buying. Then explicitly by actually buying corporate bonds as the Bank of England did in August 2016 and less obviously via the ongoing ECB programme as UK companies do issue Euro denominated bonds.

The irony of all this is that if you had bought long-dated UK Gilts two decades ago you would have done really rather well especially if you sold to the “Sledgehammer” buying of the Bank of England as it sent the market to all time highs with its panic inspired move.

What about direct contribution pensions?

These are simply ones where you put money in ( and if lucky your employer does as well) and it is invested and you make or loss depending on how the investments do. This is different to the schemes above where the employer promises a return based on your salary or earnings. According to the Financial Times just over a week ago the costs here are not quite what we are told.

The total cost of investing in popular funds, including those run by Janus Henderson, BlackRock and Vanguard, is up to four times higher than first thought, FTfm can reveal today. The Mifid II trading rules, which came into force this month, have forced asset managers to disclose hidden charges.

Some care is needed as platform charges are not caused by the fund management group but there are charges which are far from transparent.


There is much here to consider. The concept of investing for the future is simple and yet the credit crunch era has made it more complicated. For example there was a time ( and no doubt regulatory rules still suggest it) that the safest investment was a government inflation or indexed linked bond. No we see a time when in the UK and Germany you are pretty much guaranteeing yourself a loss in real terms if you hold them to maturity. If we look at conventional bonds they yield so little there is no fat on the bone as real yields are hard to come by.

Ironically this will have benefited some as if you had been holding bonds over the ,long-term then you are quids ( Dollars, Euros,Yen) in as we have been in a bull market. More recently equities have joined that party but here is the rub. In my opinion central baking easing has helped drive this too as current investors/pensioners benefit from borrowing from future returns. The claimed “wealth effects” must make it harder to make money going forwards as we note that like in Japan zombie companies which is what we are increasingly looking at with Carillion were indeed propped up.

Meanwhile I would suggested that especially if we consider their student debt burden millennials are unlikely to be able to buy a home and invest in a pension simply by giving up takeaway coffee and avocado toast.

Also I am pleased to report that the spirit of Sir Humphrey Appleby is alive and kicking at the UK Pensions Regulator.

The Regulator said: “It is too early to comment on whether with different information we could or would have taken action in the past or whether we will take action in the future, based on any new information that comes to light.” ( h/t @JosephineCumbo )



The pensions dilemma for millennials and UK Retail Sales

The credit crunch era has been essentially one where central banks have tried to borrow spending and resources from the future. In essence this is a Keynesian idea although their actual methods have had Friedmanite style themes. We were supposed to recover economically meaning that the future would be bright and we would not even notice that poor battered can on the side of the road as we cruised past it. Some measures have achieved this.

Indeed some central banks are involved in directly buying stock markets as these quotes from the Bank of Japan this morning indicate.

BOJ’s Kuroda: ETF buys are aimed at risk premiums, not stock prices. Overall ETF holdnig small proportion of overall equity ( DailyFX).

Some think it has had an impact.

Nikkei avg receiving an agg boost of c.1,700 points after curr ETF policy was adopted. The Nikkei average added 2,150 points in fiscal 2016 ( @moved_average )

Such moves were supposed to bring wealth effects and in a link to the retail sales numbers higher consumption. This would be added to by the surge in bond markets which is the flip side of the low and in many cases negative yields we have and indeed still are seeing. This is why central bankers follow financial markets these days so that they can keep in touch with something they claim is a strong economic boost. In reality it is one of the few things they can point to that have been affected and on that list we can add in house prices.


I am using that word broadly to consider younger people in general and they have much to mull. After all they are unlikely to own a house – unless the bank of mum and dad is in play – so do not benefit here. In fact the situation is exactly the reverse as prices must look even more unaffordable of which one sign this week has been the news that more mortgages are now of a 35 year term as opposed to 25 years.

They also face a rather troubling picture on the pension front. From the Financial Times.


People entering the workforce today face a “monumental savings challenge”, the International Longevity Centre-UK said in a report published on Thursday. According to the report, young workers in the UK will need to put away 18 per cent of their earnings each year in order to have an “adequate retirement income” — a higher proportion of their earnings than their counterparts in any other OECD country. Adequate retirement income is defined as around two-thirds of a person’s average pre-retirement salary.

To my mind the shock is not in the number which is not far off what it has always been. Rather it comes from finding that after student loan repayments and perhaps saving for a house which comes after feeding yourself, getting some shelter ( rent presumably) and so on. Of course some will feel that their taxes are financing the triple-lock for the basic state pension which is something which for them is getting ever further away. From the BBC.

UK state pension age increase from 67 to 68 to be brought forward by seven years to 2037, government says.

There were two clear issues with this. The first is the irony that this came out as the same time as a report suggested that gains in lifespan are fading. The other is the theme of a good day to bury bad news as the summer lull and the revelations about BBC pay combined.

Oh and tucked away in the Financial Times report was something that will require a “look away now” for central bankers.

A combination of low investment returns

You see those owning equities and government bonds have had a party but where are the potential future gains for the young in buying stock and bond markets at all time highs?

UK Retail Sales

This has not been one of the areas which has disappointed in the credit crunch era. If we look at today’s release we see that in 2010.11 and 12 not much happened as they were 98-99% of 2013’s numbers. Then something of a lift-off occurred as they went 104% (2014), 108.5% (2015), and 113.8% (2016). This fits neatly with my views on the Bank of England Funding for Lending Scheme as we see that a boost to the housing market and house prices yet again feeds into consumer demand. Actually to my mind that overplays the economic effect of FLS as it may have provided a kick-start but the low inflation levels as 2015 moved into 2016 provided the main boost via higher real wages in my opinion.

What happened next?

The first quarter of 2017 saw the weakest period for UK retail sales for a while with several drivers. One was the nudge higher in inflation provided by the lower value for the UK Pound £. Another was that the numbers could not keep rising like they were forever! Let us now look at today’s release.

In the 3 months to June 2017, the quantity bought (volume) in the retail industry is estimated to have increased by 1.5%, with increases seen across all store types…….Compared with May 2017, the quantity bought increased by 0.6%, with non-food stores providing the main contribution.

As to what caused this well as summer last time I checked happens every year it seems the weather has been looked at favourably for once.

Feedback from retailers suggests that warmer weather in addition to the introduction of summer clothing helped boost clothing sales.

If you recall last autumn we got a boost from ladies and women purchasing more clothes, is their demand inexhaustible and do we own them another vote of thanks?

Also I note that better numbers have yet again coincided with weaker inflation data.

Average store prices (including petrol stations) increased by 2.7% on the year following a rise of 3.2% in May 2017; the fall is a consequence of slowing fuel prices.

Or to be more specific less high inflation.


If we look at the retail sales data we have Dr. Who style returned to the end of 2016.

The growth for Quarter 2 (Apr to June) 2017 follows a decline of 1.4% in Quarter 1 (Jan Mar) 2017, meaning we are broadly at the same level as at the start of 2017.

Unlike many other sectors it has seen a recovery and growth in the credit crunch era. In addition to the factors already discussed no doubt the rise in unsecured credit has also been at play. For the moment we see that it will provide a boost to the GDP numbers in the second quarter as opposed to a contraction in the first.

But there are issues here as we look ahead. With economic growth being slow we look for any sort of silver lining. But of course the UK’s reliance on consumption comes with various kickers such as reliance on an ever more affordable housing market and poor balance of payments figures.

Also from the perspective of millennials there is the question of what they will be able to consume with all the burdens bearing down on them? Mankind has seen plenty of period where economic growth has stagnated as for example the Dark Ages were not only called that because of the weather. But we have come to expect ever more growth which currently looks like quite a hangover for them. They need the equivalent of what is called “something wonderful” in the film 2001 A Space Odyssey like cold nuclear fusion or an enormous jump in battery technology. Otherwise they seem set to turn on the central bankers and all their promises.



What is the state of play regarding the UK state pension?

The last 24 hours have seen the issue of pensions come to the fore in the UK General Election debate. Much of this was triggered at Prime Ministers Questions yesterday.

Theresa May has refused to commit a Conservative government to retaining the “triple lock” on pensions during a boisterous final session of prime minister’s questions before the election. ( Financial Times).

For those unaware of what it actually means the FT helps out.

which increases the basic state pension by the highest of three indicators: consumer price inflation, average earnings growth or 2.5 per cent.

This policy has had consequences which I will look at in a moment and the Prime Minister did refer to one of them although care is needed with any number provided during an election campaign by a politician.

The prime minister also referred to the triple lock in the past tense, saying it “had” boosted incomes by £1,250.

She presumably means per year.

The cost of the Triple Lock

Back in September 2015 the Government’s Actuaries released a report stating this.

A hastily buried official report has estimated that the government is spending an extra £6bn a year protecting pensioners’ incomes and warns that the cost of doing so in future years could spiral further.

What this has done at a time of claimed austerity is to put pressure on the UK public finances.

The GAD report said the triple lock was already costing around £6bn a year, with £70bn in total spent on the state pension in 2015/16 — more than the combined education and Home Office budgets.

Also it had been in play at a time when real earnings growth has been weak which led to this.

The government report said that since 2010, the guarantee had meant that pensioners’ income was £10 a week higher than it would have been had their income been uprated by earnings alone.

So there had been a transfer from workers to pensioners. If we move to last November the Parliamentary Work and Pensions Committee updated us on the state of play. From the BBC.

As a result of triple-lock policy, the state pension has risen by a relatively generous £1,100 since 2010, with an increase of 2.9% in April this year.

The Committee concluded this.

However, MPs said that while pensioners had done well out of the triple-lock, young people and working-age families had suffered unfairly.

So-called Millennials, born between 1981 and 2000, face being the first generation in modern times to be financially worse off than their predecessors, they added.

MPs said the rising cost of the state pension – £98bn in the last tax year – was now unsustainable.

The Triple Lock has achieved its target

The rationale for the Triple Lock was explained by the BBC.

Historically, pensions were linked to inflation rather than earnings, which reduced pensioner incomes relative to those of the working population.

The economic objective was to bring them more into line and of course there was a political aim as part of this as pensioners are the group most likely to vote. But if we look at what happened next we saw a combination of circumstances and indeed a Black Swan event. Step forwards the Office for Budget Responsibility!

Wages and salaries growth rises gradually throughout the forecast, reaching 5½ percent in 2014.

In this world pensioners would see incomes rise with average earnings and there would be no transfer from workers. We are of course reminded of my first rule of OBR club ( which is that the OBR is always wrong…) as the Work and Pensions Committee moves us from Ivory Tower fantasies to reality.

Low rates of earnings growth following the 2008–09 recession

This means that in reality the increases have been driven by consumer inflation and the 2.5% back stop more than earnings.

The BSP ( Basic State Pension ) was uprated in line with CPI in 2012–13 and 2014– 15, earnings growth in 2016–17 and the 2.5 per cent minimum in 2013–14 and 2015–16.

The Black Swan event was the drop in official consumer inflation to in essence 0% which impacted on the 2015/16 numbers which again brings us to the first rule of OBR club as of course it assumes 2% inflation until the end of time.

The irony of all this is that the original objective is in sight.

Provided the new state pension is maintained at this proportion of earnings the work of the triple lock, to secure a decent minimum income for people in retirement to underpin private saving, will have been achieved.

However there has been a cost to this.

Reform, a think tank, estimated that the triple lock will in 2016 result in annual state pension expenditure £4.5 billion higher than it would have been had a simple earnings link been in place. This gap can only grow.

The rising state pension age

One area that is awkward is the way that current pensioners benefit from the Triple Lock but future pensioners find that the system looks increasingly unaffordable and of course they have to wait longer to get theirs. Last Month Retirement Genius reported this.

John Cridland, the independent reviewer of the state pension age, made three key recommendations.

First, that the state pension age should rise from 67 to 68 by 2039, seven years earlier than currently timetabled…..The second report by the GAD presented a scenario of faster rises which could see those aged under 30 only having access to the state pension by the age of 70.

So there was potentially grim news for Millennials who seem only to get bad news don’t they?

Should we take it away from the well-off?

This suggestion has been floated in the Financial Times today.

The UK should not give a state pension to the rich and instead use the money to boost payments to the poor, the OECD has said. The Paris-based club of mostly rich nations said cutting payments to the wealthiest 5-10 per cent of retirees would “free up resources” to raise British pensions, which are low compared with other wealthy nations, for others.

An interesting idea and considering its readership group it is brave of the FT to print this! Whilst in itself it seems to have things in its favour (redistribution) there are catches. For example higher income groups will be paying income tax on this and sometimes at higher rates of it. Also there is the belief that this is a system that is paid into and we are excluding the group who in general will have paid the most. Of course reality is not like that as they paid in fact for their predecessors pensions but even so it is a little awkward.


There are various issues here. The first is the irony that the Triple Lock is under fire for in essence doing what it was aimed at which was pensioner poverty. It is not a cure but it has helped by raising the Basic State Pension. The catch has been the economic environment where low rises in real wages have combined with the choice of a 2.5% back stop to the increases have made it not only increasingly expensive but also the equivalent of throwing the Ring of Fire into Mount Doom to the forecasts of the OBR Ivory Tower.

So we have an issue of possible failure by success and if it has been that then it was the 2.5% back stop which has caused it combined with other choices such as limiting other benefit increases to 1% per annum. It is a complex mixture which looks unfair basically because it is.

We also live in a world where there are so many ch-ch-changes to state pension entitlement and whilst going forwards the state pension was raised a year ago there was a catch which resonates with me.

One of biggest changes to state pension in 2016 was scrapping of right for spouses to inherit partner’s pension when they died. ( Josephine Cumbo )

This is because when I sorted out my mother’s financial affairs after my father’s death she benefited from inheriting some of his state pension.

The establishment

They seem to be doing okay as this tweet about the retirement party for the Director of the Tate Gallery Sir Nicholas Serota suggests. The asterisks are mine.

Lots of Tate staff are outsourced, low-waged and/or on zero hours contracts. Tate are asking them to help buy Nick Serota a f**king yacht. ( @charlottor )

Me on Official Tip TV

The ongoing UK problem with pensions

Today has brought a piece of news that is another element in an ongoing saga. It also brings into play some economic developments that are interrelated to it. Oh and a past manipulation of the UK public finances. From Reuters.

Royal Mail said on Thursday it would close its defined benefit pension scheme at end-March 2018 after a review found it would need to more than double annual contributions to over 1 billion pounds to keep the plan running.

Royal Mail, the British postal service privatised in 2013, said it was one of only a few major companies that still had employees in a defined benefits scheme, a type of pension that pays out according to final salary and length of service.

The company, which pays around 400 million pounds a year into the scheme, said it was currently in surplus, but it expected the surplus to run out in 2018.

There are various initial consequences such as threats of strike action from the postal union and something to cheer central bankers everywhere. From the Financial Times.

Investors were more positive about the plan, however. Shares in Royal Mail rose 1.6 per cent after the announcement to their highest level since January. JPMorgan Cazenove analysts estimated last month that markets have already priced in a £100m a year step-up in pension charges, and investors have welcomed signs of an end to questions over the scheme’s future.

UK Public Finances

Those who recall my analysis from 2013 will remember that this is another version of the Royal Mail pension scheme that was originally booked in the UK National Accounts for a £28 billion profit! How can you have a profit on acquiring something which is unaffordable? Later the methodology was quietly changed.

This reflects the shortfall between the £28 billion of assets transferred from the RMPP and the £38 billion of future pension liabilities that were consequently assumed by Government…….. Furthermore, the transfer of the assets no longer reduces borrowing as it did under ESA95.

To be fair to our statisticians and indeed Eurostat they did catch up with this manipulation eventually but of course by then the public’s attention had moved elsewhere.

Why are these pension schemes now so unaffordable?

The latest report from HM Parliament describes the problems and issues.

poor investment returns, associated with low underlying interest rates and loose monetary policy following the 2008–09 financial crisis and associated recession;8


rises in longevity that have been faster than was widely anticipated;


sponsor behaviour, including many employers taking contribution holidays when schemes were in surplus.

Only actuaries and economists can make rising longevity seem a bad thing! But if we move to the effect of low interest-rates there is this evidence from Deputy Governor Ben Broadbent to HM Parliament on this and the emphasis is mine.

First, I don’t think it damages the value of their assets; it pushes up the price of their liabilities. That is what happens when bond yields fall. The price of that bond and the present value of the liabilities go up. But it also pushes up the assets.

Even with such analysis Dr.Ben was forced to admit that schemes in deficit were net losers. But I find the overall idea that they lose on the swings but gain on the roundabouts simply extraordinary! Another example of Ivory Tower thinking. You see they have present gains although of course they will be across many markets but the real issue is that they have to pay for future liabilities and the answer misses of the fact that pension funds have going forwards to buy assets such as bonds which are much more expensive. Indeed in an odd but true development pushing up the price of ordinary UK Gilts via QE has in some ways had more of an effect on index-linked Gilts which are not bought! This matters because most defined benefit schemes have inflation based liabilities to pensioners.

The odd case of index-linked Gilts

Because ordinary Gilts offer so little interest these days and index-linked Gilts offer annual coupons based on the Retail Price Index ( 3.1%) if you need income then linkers look more attractive. Of course the price adjusted to this but this means that the Index-Linked Gilt market is in quite a bubble right now. It also means that it is in a way not fit for purpose as it is being priced on annual cash returns rather than inflation prospects as we see yet another market which has been turned into a false one by the central planners.

I have written before about how you could lose money by being right about UK inflation and this is why. So how do pension funds now hedge inflation risk?

The UK Gilt market

This has been on something of a surge recently or perhaps I should say another surge. Let me put an apology in with that because that has wrong-footed my stated view on here as I expected it to fall as inflation prospects deteriorated.  But  the ten-year Gilt yield is quite near to 1% and the two-year yield is 0.1% which is insane in terms of real yield with inflation heading to 3/4% depending on the measure used. Pension funds look a long way ahead so if we look at the thirty-year yield we see it has fallen to 1.63%.

Thus if we switch to prices we see that any investment now is at an extraordinarily expensive level. What could go wrong?

Actually according to HM Parliament defined benefit schemes tend to value themselves versus the higher quality end of the Corporate Bond market.

scheme funding statistics show that discount rates used by DB pension schemes for calculating liabilities since 2005 have consistently been around 1 per cent above gilt yields.

Can anybody spot a flaw in the Bank of England buying £10 billion of these ( £9.1 billion so far) to raise the price and reduce the yield?

Pre pack problems

Another issue was raised by Josephine Cuombo in the Financial Times.

Companies in the UK have used a controversial insolvency procedure to offload £3.8bn of pension liabilities, often as part of a sale to existing directors or owners, a Financial Times investigation has found…….

The FT investigation found that two in three pre-pack schemes entering the PPF involved sales to existing owners or directors. A string of prominent cases that used pre-pack arrangements, but where companies are still trading, include the turkey producer Bernard Matthews, the bed company Silentnight and the textile group Bonas.

In essence the schemes have found their way into the Pension Protection Fund which is backed by the industry thus raising costs for other schemes and pensioners get reduced benefits.


When the Bank of England looks at pensions it is hard to avoid the thought that views are influenced by their own more than comfortable position. For example in its latest accounts Ben Broadbent had received pension benefits valued at £104,586 in the preceding year. It is also hard to forget that just as it was telling everyone inflation was going lower back in 2009 the Bank of England piled into index-linked Gilts in its own scheme! But for everyone else involved there are no shortage of sharks in the water.

As to the befuddled and bemused Ben Broadbent he has views which question why we pay him at all!

One thing I want to get across today is not to confuse the low level of interest rates with monetary policy…….

Even though we are that last link and even though it is the MPC that sets interest rates, it is not a realistic question—I do not think it is a realistic premise to say low interest rates are because of monetary policy.

Until of course he can claim gains from his policies….

Let me sign off for a few days by wishing you all a very Happy Easter.




The Bank of England is piling up problems for UK pensions and savers

Yesterday Bank of England Chief Economist Andy Haldane took to The Sunday Times to reinforce his views. Presumably he felt that the print equivalent of more Open Mouth Operations would tell us more about what he means by a monetary “sledgehammer”. In it he offered very cold comfort to savers who will be affected by the interest-rate cuts and QE (Quantitative Easing ) he is such a fan boy of.

Understandably, some savers are feeling short-changed. Although I have enormous sympathy for their plight, the decision to ease monetary policy was, for me, not a difficult one.

Actually punishing savers is not a new policy for the Bank of England as Deputy Governor Sir Charlie Bean – just about to arrive at the Office for Budget Responsibility which is ever more breathtakingly described as independent – told savers this back in September 2010.

Savers shouldn’t see themselves as being uniquely hit by this. A lot of people are suffering during this downturn … Savers shouldn’t necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit.”

Sir Charlie then used the forecasting skills he will apply at the OBR to predict better times ahead for savers.

It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.

Actually the swings only go backwards and the roundabouts long stopped spinning. An example of that has happened overnight according to MoneySavingExpert.

Depressing news for savers. Santander 123, the bank account that’s topped savings tables for over four years, will take a hammer to the interest it pays from 1 November. It comes on the back of this month’s base rate cut of 0.25 of a percentage point from 0.5% to 0.25%, but it’s slashing its rate far beyond that, cutting the headline interest from 3% to just 1.5%.

Of course such cuts do not apply to Sir Charlie who has his Bank of England pension linked to the Retail Price Index as well as his salary from the OBR.


The issue here is a consequence of the rise in the price of long-term UK Gilts and the consequent fall in yield. Last week Bank of England Governor Calamity Carney sent in his bond buyers in this area but was gamed by the holders and ended up pushing prices much higher than intended. Of course Andy Haldane will consider this to be a success as he explained to Parliament in from June 2013.

Let’s be clear, we have intentionally blown the biggest government bond bubble in history.

The bubble is of course a lot bigger now and is much larger than any West Han fan will be able to blow later. The thirty-year UK Gilt yield is a mere 1.24% so let us review the consequences for annuities which of course depend on such yields. From This Is Money.

A decade ago, a 65-year-old with a £100,000 pot could get £7,092 a year from an annuity, though without any link to inflation…….At the beginning of July, a 65-year-old saver would have been offered just £4,800 for each £100,000 by insurance giant Legal & General……Today it offers £4,462 a year on the same deal — 8 per cent less than a few weeks ago, according to research by annuity expert William Burrows.

The numbers quoted will be lower should annuitants want inflation protection or to provide an income for their spouse.

A clear consequence of this can be seen below. This is from the Association of British Insurers on the first year of pension freedom where the rules on how you take your pension were relaxed.

£4.3 billion has been paid out in 300,000 lump sum payments, with an average payment of £14,500.
£4.2 billion has been invested in 80,000 annuities, with an average fund of £52,500.

We do not know the individual circumstances behind this but I note that money has shifted from being for future consumption ( an annuity) to presumably consumption now ( cold hard cash). Another way of describing this is borrowing from the future. A problem is that annuities pay out for the rest of you life whereas if you take the money and run it may well run out. Please do not misunderstand me annuity rates now are so poor I can understand why people do not take them and I wonder how many of those taking them are getting higher rates due to ill-health.

As the Bank of England blunders into the UK Gilt market I can only see annuities getting less attractive and looking even poorer value.

The Millennial problem

There is a consequence from all of this from younger workers and present and future pension savers as summed up by Bloomberg.

Younger workers will “have to save more — which they appear reluctant to do — or be prepared to work much longer.”

As I have pointed out before such age groups (millennials are 35 and under) have tended to be more affected by the credit crunch in terms of real wages. So they have less money out of which they are expected to pay more whilst in many cases paying off student debt and facing ever higher house prices. That road leads to such phrases as “Generational Theft”

This will not be helped by the Lifetime ISA situation which as recently as the beginning of this month was described like this by City-AM.

A YouGov poll said that 44 per cent of Britons between the age of 18 and 39 would favour using the government’s new lifetime Isa in order to put money aside for older age. Such a decision would put them on a “collision course” with auto-enrolment.

So even then one government policy was clashing with another. Well today the Lifetime ISA concept itself seems to be struggling. From The Financial Times.

The planned launch of a new savings account for under-40s in April is in doubt after providers warned that the government’s failure to provide key details means they will not have enough time to hit the deadline.

The UK pension system has seen far to many ch-ch-changes and these have progressively weakened confidence in the system. A decade ago I passed one of the advanced examinations on the subject only for there to be changes year after year!

Defined Benefit Pensions

On the 9th of this month I pointed out the pensions desert which would suck up the extra £70 billion of Bank of England QE liquidity.

The deficit of defined benefit pensions, which pay out an income linked to an employee’s final salary, jumped £70bn as a direct consequence of the decision to reduce interest rates by 0.25 per cent, according to Hymans Robertson, the consultancy.

We should not be surprised as this as the architect confessed to this only in May.

Yet I confess to not being able to make the remotest sense of pensions. ( Bank of England Chief Economist Andy Haldane).

He and his colleagues are proving it almost daily. Rather like at the Emirates yesterday there is a danger of “You don’t know what you’re doing” being sung.


We see that as I have pointed out many times before the savings and pensions sector of the UK economy have been targeted by the Bank of England. The  doing “very well” promised by the then Mr.Bean back in September 2010 has not only failed to appear things are getting worse. This makes the economy unbalanced and creates real damage as the corporate sector acts to fill pension deficits and younger workers face have to put ever larger sums of money away. Meanwhile though in an Ivory Tower in Threadneedle Street.

The purpose was to support growth and jobs.

No mention of the inflation target Andy? Oh and even he does not seem to think it will work.

At the same time, no one on the MPC is under any illusion that monetary policy can fully insulate Britain from the long-term effects of the decision to leave the EU.

He looks a rather dangerous gambler who by his own confession is responsible for one of the largest shifts of wealth in history.

Over recent years, there have been fairly rapid rises in UK asset prices — houses, shares and bonds. These have increased measured national wealth by as much as £2.7 trillion since 2009.

Yet apparently the consequences are nothing to do with him and we need ever more. My view on the consequences comes from the Red Hot Chilli Peppers.

Scar tissue that I wish you saw


Of Bond Yields and Productivity without forgetting Brexit day songs

Hello and welcome to the day the UK finally votes on European Union membership or Brexit. In London the weather was on the case as we have had what Freddie Mercury called “thunder and lightning, very very frightening” overnight and more of the same is expected later. Please do not be put off by what has been a nasty campaign – the kinder campaign promised last week seemed to have a shorter life than a Mayfly – and vote whatever your leaning as it is a right people have fought and died for.  The currency markets with the UK Pound £ at US $1.48 and Euro 1.30 have placed some one-way bets but of course if markets were always right life would be a lot easier than it is! Anyway let us move onto today’s subject except as you might expect there will be a song list for Brexit referendum day.

Bond yields and productivity

This is an issue raised by the former IMF Chief Economist Olivier Blanchard at the Pieterson Institute. But first we are reminded of something important which is that the rules that apply to us plebs do not apply to the establishment. Monsieur Blanchard was responsible for the policies applied to Greece on his watch as I note this from his Ten Commandments in June 2010.

Fiscal adjustment is key to high private investment and long-term growth.

Of course the fantasies about a Greek economic recovery were produced on his watch too. Then there is this.

You shall target a long-term decline in the public debt-to-GDP ratio, not just its stabilization at post-crisis levels.

As well as Greece which also needed a default ( PSI ) in 2012 we have Portugal to consider here. Of course Olivier had a mea culpa later on which is welcome but if an airplane designer had seen the results of his work crash and burn like what happened to Greece who would fly on his/her next plane? Anyway Olivier has carried on pretty much regardless.

The Economics

Olivier opens with something of a strawman argument.

Long-run productivity growth appears likely to be low, and productivity growth and interest rates move largely together, so one should expect long rates to be low as well.

We have very little idea of where interest-rates as in bond yields would be without all the intervention as I note that today we have learned that the Bank of Japan now owns 34% of the Japanese Government Bond Market. Olivier is not keen on that argument for different reasons though.

Yes, measured productivity growth has decreased, and seemingly not due to measurement error (Byrne et al. 2016, Syverson 2016).

I have highlighted the bit with which I can only disagree completely. As I look ever more deeply into the UK data on the subject I realise that we know much less than we think and that we could and probably are making large mistakes. Actually Olivier behaves like a stereotypical economist here.

Expect lower productivity growth, but be ready to be surprised.

The bit that I note is like my “something wonderful” ( 2001 A Space Odyssey ) thought.

But when one listens to Silicon Valley, one cannot help but expect a substantial probability of a much larger role for robots and artificial intelligence in general, and by implication, much higher productivity gains.

That seems a likely future but missed by Olivier is the implication of that. Will it be a science fiction Star Trek style world where the benefits of capitalism are shared around? A  time of leisure and ease for all. Or will it be a type of Marxist world where capitalists overlords amass great wealth paid for by their robots whilst the ordinary person sees harder times. In science fiction terms that makes me think of the Harkonnen’s in the novel Dune. It makes me shudder a bit.

We move onto an area where Olivier appears for a while to be influenced by the early work of Oasis.

that people live forever, or act as if they lived forever, and that people are willing to defer consumption if the interest rate is higher.

The latter part of that has seemed to be true in the past but we know in our new world of negative interest-rates that people are willing to defer consumption as well if the interest-rate is not only lower but pretty much zero. I have written recently about the Swedish propensity to save continuing well the Germans seem rather keen on it as well.

I am not so sure that the Germans are that peculiar as I note that the Euro area without them has not seen that much of a fall in savings once we allow for the fact that some of it has hard a very hard credit crunch. Only yesterday the Swedes took some time off from the football and cheering the last international for the Zlatan to let us know this.

Households’ net deposits were at a record level of SEK 35 billion, mainly in regular savings accounts in banks and at the Swedish Tax Agency during the first quarter of 2016.

What is the conclusion?

Well we are told this.

Forecasts of long-term growth, and the general commentary in newspapers, are gloomy. I believe that this bad news about the future largely explains the relative weakness of demand today. Put in more academic terms, bad news about the future supply side is leading to a Keynesian slowdown, or at least a weaker recovery today.

Olivier skirts over the disaster that has been official “Forward Guidance” so his first factor is an ever weakening influence as people listen less and less to people like him. However he misses important points which explain why we are where we are and again sometimes he is simply wrong.

Banks are no longer deleveraging, and credit supply is abundant and cheap.

As to banks no longer deleveraging that is not what I have been hearing and seeing. We see a regular flow of job losses on the news wires and occasional large retrenchments such as Barclays announcing plans to pull out of Africa. That is before we get to the share prices of banks around the world. If we move to credit supply it is abundant and cheap in many places for consumer borrowing but if the UK is any guide much less so for companies and businesses.


There are things to consider here and deeper issues that Olivier’s it might stay depressed or it might improve analysis. Let me remind you again of another issue he has dodged which is that one of his variables interest-rates ( I am including bond yields here) has been driven by what he might call “people like us”. This has changed the world as the idea of a market driven interest-rate seems an anachronism from a distant past and investors spend their time trying to front-run central banks. What could go wrong? Tucked in there might be an explanation of why people are saving for no apparent return at these levels of interest-rates.

Also our world has seen apparent expansionary policy have contractionary influences. The impact of QE in the UK helped reduce real wages in 2011/12 for example from which they have yet to fully recover. Also there is the issue of long-term saving and pensions how does that work in our supposedly brave new world? People may think they need to save more whilst around the world we see businesses being told they need to put more into pension funds which is another contractionary effect of our QE world. Oh and all the can-kicking has left people afraid not unreasonably in my view that it could all happen again. In fact it seems more likely and not less in more than a few places.

Songs for Brexit Day

Should I Stay or Should I Go Now by The Clash

The Final Countdown by Europe

Making Your Mind Up by Bucks Fizz

For Remain

Stay by Jackson Browne

Stay by Eternal

Don’t Leave Me This Way by The Communards

Please Don’t Go by KC and the Sunshine Band

It’s The End Of The World As We Know It by REM

Come Together by The Beatles

For Leave

D-I-V-O-R-C-E by Tammy Winette

Fifty Ways To Leave Your Lover by Paul Simon

Go Now by The Moody Blues

Another Brick In The Wall by Pink Floyd

Burning Down The House by Talking Heads

I Want To Break Free by Queen

Go Your Own Way by Fleetwood Mac

Should we get another vote

Coming Around Again by Carly Simon

Europe Endless by Kraftwerk

Complete Control by The Clash


Thanks for the suggestions I have already received.





What is happening to UK pension provision and schemes?

One of the features of the UK economic environment over the past decade or so has been the extraordinary changes in the rules and indeed position of pension provision. This covers both state and private-sector provision. Some of this has been related to developments in the credit crunch era but some is also related to pork barrel politics. What this has done is create something of a quagmire where benefits and losses are distributed often in a fairly random fashion which poses a problem. It was not that long ago I passed the advanced pension examinations of the Chartered Insurance Institute but the truth is that the landscape studied then no longer exists. This in itself poses a problem for an industry that exists for the long-term.

State Provision

There has been a dizzying array of changes here in recent years. Let me start with something which has had a positive impact on what many pensioners receive. From HM Parliament. BSP is the Basic State Pension.

The Coalition Government commenced the legislation and committed itself to increasing the BSP by a “triple guarantee” of earnings, prices or 2.5 per cent, whichever is highest, from April 2011.

That has boosted pension incomes and mostly via the law of unintended consequences. For example this year the uprating will be in essence a real terms increase as earnings were rising at 2.9% and official inflation has been very close to zero. This follows on from a 2.5% increase previously which means as I have discussed in my updates on the UK public finances that there has been quite an impact via higher expenditure which was estimated at £6 billion a year before the report was quickly redacted. Or to put it another way a type of generational shift in incomes.

As a result, someone on a full basic State Pension can expect to receive around £570 more a year in 2016-17 than if it had been uprated by average earnings since the start of the last Parliament,

This is not the whole story as confusingly what are called additional state pensions only have to rise with inflation and after the swerve a few years back to use the CPI (Consumer Prices Index) they are somewhat becalmed. So we have seen a change withing pensioners incomes as those who have paid in extra to get more have been treated less favourably than the basic pension. Just to add to the mix a new state pension starts in April for new pensioners and it will rise with earnings.

You will get it later

The UK state pension age has been 65 for a long time but it begin rising to 66 in December 2018 and 67 in 2026 in response to rising longevity. Later it will go to 68 but the rules will no doubt have changed by then as for example the change to 67 was brought forwards by 8 years in 2014! So far we have a familiar story of jam today where current pensioners have benefited but future ones face adverse changes although of course should the triple lock remain they will benefit too.

A catch in this saga is happening to a segment of the female population who expected their state pension at 60 and are now getting it at 63 on the way to it going to 65. This has become a contentious issue. Not so much on the issue of equality but much more on the lines of the fact that the changes were accelerated leaving one particular group disadvantaged as highlighted by the WASPI campaign and as I have pointed out earlier there is an issue with continual changes in something which relies on long-term planning. Also the pension age will be equalised at 65 just in time for it to become 66. Oh Well! As Fleetwood Mac put it.

The private-sector

If we look at the situation we see that the economic environment has changed substantially. There have been capital gains for some especially in government bond markets but looking forwards there is little yield now to be found in these areas. For example the plunge in yields has benefitted those who held both ordinary and index-linked UK Gilts. Those who have followed me from my beginnings will recall me making a case for holding index-linked Gilts. For once I was in concert with the Bank of England which put around 90% of its pension fund in them which has allowed it to fund the high level of pensions highlighted by what Mervyn King and the Deputy Governors have received. However looking forwards the picture is very different. For now there is a real yield but as soon as the oil price stops dropping it seems set to disappear and as pension planning is often over a 20/30 year timescale there is a problem.

As to changes well the Bank of England keeps promising but not delivering on higher interest-rates leading to the fear that like in Europe we could head lower. After all it was only last Thursday that the President of the ECB Mario Draghi hinted at a further cut to an interest-rate which is already -0.3%. Long-term contracts struggle with this sort of negativity as I recall when Andy Z placed the pensions illustration which has a return of -0.3% as part of it in the comments section. How does that work?

There is also the issue of equity markets where the capital to dividend position has been in reverse. We find ourselves in a situation where depending on the exact reading at the time the UK FTSE 100 has been on a road to nowhere this century overall whereas there have been dividend returns. If you want yield these days it has to be dependent on company profits such as utilities.

Legislation ch-ch-changes

The last decade or so has seen a litany of changes which returns us to the long-term planning theme. We have seen the minimum age for taking a private pension move from 50 to 55 but not a compensating move from 75 to 80. This is a bit bizarre as whilst there may not be a lot of people wanting to pay in at 75 why shouldn’t they be able to? Also there are complicated rules for continuing pensions beyond 75 but complicated rules invariably lead to trouble in the end – the law of unintended consequences again- as well as racking up a high level of fees and expenses. Plus rules have been set for maximum amounts both annual and lifetime with promises made and then welched on.

Now there has been this change which returns me to the switch between capital and interest of which the latter appears as annuities. From the BBC.

You can now access that pot freely from the age of 55 (57 from 2028), taking out as much as you like, subject to tax.

This is for defined contribution schemes where you pay in and receive tax relief and take the money later after hopefully it has grown and some 25% is then tax-free. The driving force behind this change is the poor value of annuities which has been driven by lower bond yields. Quite how they work now in Switzerland or Germany where many bond yields are negative I do not know? But whilst annuities are flawed they do guarantee an income as we wonder what happens next.

So such a change should encourage more pension provision but the many changes are likely to have a reverse effect as people wonder if it will last? The uncertainty is added to by the proposal to scrap higher-rate income tax relief. This has been trimmed to some by other changes and has equity and fairness on its side to some extent but would be yet another change in a very long list.

Defined benefit schemes

This has been perhaps the clearest shift of all as it dies away in the private-sector and only exists in the public-sector because the full costs are rarely looked at. Also of course ministers, MPs and high level civil servants are the current major beneficiaries of them! But with inflation indexing so expensive in spite of the current low inflation rate there is trouble. The problems for the private-sector are added to by the rules under which they operate for solvency and assessment which are somewhere between bizarre and crackpot in my opinion.

Those retiring now on such schemes are benefiting highly and apart from the public-sector schemes that is now mostly in the past. A famous beneficiary was former Bank of England Governor Mervyn King whose antipathy to RPI inflation did not extend to his own pension fund which ended up being worth around £8 million. Of course on the other side of the ledger the case is much muddier for nurses,teachers and the police who get much lower sums and would reasonably argue that it is part of their pay deal.


There are good news stories here as it used to be the case that UK state pension provision was low and had been left behind by events. Obviously there are still people with low incomes but the rise in the basic state pension will have particularly helped the less well off and I welcome that. Although it has resulted in another issue for the public finances

But the multitude of other changes that have gone on have created an atmosphere of mistrust and who could blame the young for having no confidence in what they will receive? They could lose out at a stroke of a bureaucrats pen. The continual Ch-ch-changes are likely to see yet more money head towards the housing market where the situation is much simpler and easier to understand than pensions. This from the Guardian suggests changes in that direction.

A record amount of housing wealth was unlocked by homeowners aged 55 and over in 2015, with £1.61bn withdrawn through specialist equity release plans.





UK Pensions Annuities and Gilt Yields enter an Alice In Wonderland universe

Yesterday there were three pieces of news which in fact were interrelated even though they came from opposing sides of the Atlantic Ocean. Let me present them in chronological order.

The Executive Board of the Riksbank has decided to make monetary policy even more expansionary by cutting the repo rate by 0.15 percentage points to −0.25 per cent and buying government bonds for SEK 30 billion.


The (UK) Chancellor has announced that the government will extend its pension freedoms to around 5 million people who have already bought an annuity.


(Bloomberg) — Money-market futures traders cut the odds of a Federal Reserve interest-rate increase below 50 percent until December after Chair Janet Yellen lowered her outlook for growth and the pace of policy tightening.


These three apparently unrelated moves are in fact part of the trend to lower interest-rates and indeed bond yields that has been evident throughout my career. There have been ebbs and flows but the Status Quo has been this.

Get down deeper and down
Down down deeper and down
Down down deeper and down
Get down deeper and down


The Swedish Riksbank seems to have lost what little part of the plot it had retained and cut again against the bankground (background if you prefer) of a strong economy. Then if we move to the US Federal Reserve came a move which regular readers will know I was expecting. It removed the word “patience” from its report but then stepped backwards rather than forwards on the subject of a future interest-rate increase in the United States. One is coming soon or maybe later or maybe not at all as it desperately tries to mimic the boy or rather girl in this instance who cried wolf. Or in terms of Guns and Roses a bit more than a little patience will be required.

Said, woman, take it slow
It’ll work itself out fine
All we need is just a little patience


Government Bonds

This is where the link between the UK and US news comes in. As well as the extraordinary drop in the US Dollar ( The UK Pound nearly made US $1.50 as traders were stopped out) there was a surge in US Treasury Bonds. The ten-year Treasury Note shot higher and the yield dropped through 2% to 1.92%. But it a way more important for this discussion we saw the long bond or thirty year rally two whole points as the yield dropped to 2.52%. The yield had been falling anyway as poor economic data continued to appear. Yes this weaker data was continually described as a “surprise” which those of you who have seen my exchanges on twitter with Newsnight economics editor Duncan Weldon may already have noted.

Those who listened to the Budget analysis on Share Radio would have heard me point out that Germany was at an all time high for bond prices and consequently low for yields. As I type this the ten-year yield has fallen to 0.19% according to MTS which is yet another high. Now if we move to the UK we are seeing the pressure build too especially now that the US is moving. Accordingly the UK Gilt market has rallied today and our ten-year yield is 1.55% and more to the point of today’s discussion the 30 year Gilt yields 2.36%. Both are hard to type for someone like me who has so much experience of much higher numbers.

Long-Term Contracts

These have a problem with such low interest-rates. Imagine for a moment an annuity provider in Germany for example looking to offering deals to people 2,5,10 and 30 years into the future. In the first two instances it faces negative bond yields so it would have to offer less than paid in. What a great deal! Moving forwards a 30 year yield on 0.65% offers very little return as the concept begins to implode.

The UK annuity market is not yet at that extreme but with a 30 year yield of 2.36% yields are really rather poor. Or to link matters virtually anyone who has taken out an annuity in the past will have got better terms than they can now. Of course many of them thought that they were getting poor terms! In essence annuity rates are the flip side of falling bond yields.

As an aside final salary pensions just got a little more attractive again or putting it another way we will see less and less of them in future.

Annuity Rates

Many with a pension scheme have found themselves facing this conundrum. From the Pensions Advisory Service.

Over recent years, annuity rates have fallen as we have moved into a low-interest rate environment and annuities have, consequently, become less popular.


Add that to an illustration showing you losing 3% per annum as discussed in the comments on here and no wonder pensions sometimes get a bad press!

If you crunch the numbers for a basic (single life no add-ons) annuity at age 65 then it takes around 17 years to get your money back. This is awkward and leads to the view that an annuity is bad value. The government heard the cries of “we would rather keep the money and spend it” and as it mulled the issue no doubt the thought that older people are more likely to vote saw it saw well why not let them?

There are two contrasting views on this. Firstly it frees people up to do what they want with fewer restrictions which is a good thing. However on the same road we see that there is the danger we are borrowing from the future one more time. We are doing that rather a lot these days and for the moment let us ignore the nightmare scenario that the money goes into buy to let investment in the UK property market.

What about existing annuities?

To a government the fact that there are around 5 million annuities must be tempting as of course they are in a population demographic which is likely to vote. They currently are as a group in “profit” as some will have terms vastly better than available now some a lot better and other simply better. No doubt someone somewhere has a loss but this will very much be the minority. Easy money?! Not quite as of course there is another side to the arrangement which is the pension or insurance company which will in generic terms have hedged its position in UK Gilts which will have bought corresponding gains. Oh hang on everybody cannot win! The circle is squared so to speak by the fact that the insurance company is losing on its annuity book compared to current values and prices. It is not even a zero sun game as the pension company will have set out to make a profit so it is in fact a negative sum game.

But our brave establishment knows no bounds in its efforts to borrow from the future or as it puts it give more freedoms! Accordingly we will in 2016 get this.

From April 2016, the government will remove the restrictions on buying and selling existing annuities to allow pensioners to sell the income they receive from their annuity without unwinding the original annuity contract.


Hooray so they can take their profit? If you think that please hold your horses and read my explanatory paragraph again. Here is the official version.

it allows the annuity holder to access the value of their property rights where they can find a willing buyer. The annuity provider would continue to pay the annuity payments for the lifetime of the annuity holder, but would reassign those payments to the purchaser.


So we are reminded that this is a personal contract dependent on an individual’s life. Time I think for Alice In Wonderland to help us out.

I can’t go back to yesterday because I was a different person then.


Why, sometimes I’ve believed as many as six impossible things before breakfast.


Putting it in more sophisticated terms perhaps then this reply to making my views known on twitter sums it up. From @NotGiacomo

you don’t think we should trust consumers to correctly price their own derivatives contracts?



Somewhere in this UK establishment version of Alice’s Wonderland the following scenario will play out. Grandad or Grandmother will sell their annuity and take the cash. Then they gift some money to their granddaughter Alice who needs some help to buy a house as she is struggling with her student debt burden. Alice will use the benefit of her university education to figure out that for every £100 she gets from the bank of Grandad/mother she will get another £25 from the UK Taxpayer.

have i gone mad?
im afraid so, but let me tell you something, the best people usually are.


If we move back to the pension changes and overlook the dangers of yet another misselling scandal, how many more times are they going to change the rules? I have the formal qualification from the Chartered Insurance Institute but threw away my textbooks the other day. In spite of being recently purchased they are relics of another era.

I wonder if I’ve been changed in the night. Let me think. Was I the same when I got up this morning? I almost think I can remember feeling a little different. But if I’m not the same, the next question is ‘Who in the world am I?’ Ah, that’s the great puzzle!