Newspaper article The Evening Standard (London, England)

Bonds Bubble Blows Up a Pensions Crisis

Newspaper article The Evening Standard (London, England)

Bonds Bubble Blows Up a Pensions Crisis

Article excerpt


*THE Government met the great and good of the pensions trade today, and one document should be required reading. Barclays Equity Gilt Study is unlikely to be a bestseller, but it's now in its 50th year, and the anniversary issue is a corker.

The chart here (its caption "Portrait of a Panic" is not some piece of journalistic licence, but the description given by the study's authors to the crisis in the markets which recent legislative changes have produced) tells the story.

The conclusions of the study are hardly a surprise; the real return (after inflation) to buyers of British government securities has averaged 3% over the last two-and-a-half centuries. Long bonds currently return less than 1%.

As Tim Bond points out in the first chapter: "2006 opened with the unedifying spectacle of UK financial markets gripped by an entirely self-manufactured pension fund crisis."

He goes on: "Defined benefit pension funds, increasingly entangled in a thicket of technical restrictions and accounting prescriptions, are trapped in a self-fuelling bubble at the long end of the yield curve." If that sounds like gobbledegook, it's because the actuaries prefer it that way. They calculate the current liability of a pension fund by looking at the yield on long-dated securities, so the lower the yield, the bigger the sum needed to cover the liability.

They urge the fund to buy more long-dated securities, pushing the price up (and the yield down) so when they next do their sums, the liability has gone up again, requiring still more purchases, which push the price up... The way the actuaries see it, the capital gain on the investments counts for nothing when set against the new "discount rate". All funds face similar pressures, but the quantity of long-dated gilts is limited. The result, says Bond, is "an undignified scramble by an [pounds sterling]800 billion industry to invest in [pounds sterling]41 billion of assets."

How on earth have we got here? The cause is our old friend, well-meaning le gislat ion. The prospect of Turner & Newall workers ending up with nothing after a lifetime of saving, because of the failure of the parent company, was more than the Government could bear. …

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