The Plowman is confused
The UK government is shifting to shorter-term borrowing to lower its interest bill as a global debt sell-off adds to the pressure on its tax and spending plans.
Jessica Pulay, head of the UK’s Debt Management Office, said the agency was softening a reliance on long-term borrowing that has made the country an outlier among major global bond markets, amid falling demand from institutional investors.
The 10 year bond has not done well against G7 peers
The 30 year UK gilt is yielding more than any of its equivalents in the G7
Shorter-term debt is currently cheaper to take out — an important consideration for a country whose issuance costs have surged this year and whose Labour government is struggling to remain within its tight fiscal rules.
Impact on pensions and annuities.
The current 30 year gilt yield is at a high for the century.
Last week the 30-year gilt yield climbed to 5.48 per cent, also pushed up by global markets unsettled by worries about Donald Trump’s tax-cutting budget bill. The long-term UK borrowing benchmark is up 0.37 percentage points this year and close to its highest level since 1998.
Now is a most unusual time for pensions, not because of the equity markets (which are back where they were at the beginning of the year) but because of the gilt markets both sides of the Atlantic.
I am not expert in these things but this blog has many readers who are. Can anyone send me their thoughts to henry@agewage.com or post them in comments. I know you but will respect anonymity if you want it!
It’s called danger money
Yes it’s where ‘the model’ starts to come apart at the seams, as the gilt glue dries up.
Commercial insurers, too smart, won’t rush to the danger money, and the route to buy-in creates net sellers of Schemes.
Govt/Treasury tend to ignore the solutions and to try to kick this can down the road, leaving for the next Chancellor/ Govt ( “there’s no money left”).
The Fix – Refer to the Hymans March 2025 paper (The untapped potential of pensions), that presents a phased transition (and growth supporting re-investment) for DB that protects Gilt demand. Hopefully Govt will get there sooner rather than before it’s too late! The only real alternative if we continue with the can-kicking is “super-mandation” (ie nationalising ) of those with the money, which increasingly given the £50bn risk (ie wealth) transfer leads to the Insurers….
As clear as the nose on your face.
Thanks Jnamdoc, you are tireless on this.
Thanks for the reference to the Untapped paper. Just to add a link to the paper for ease. https://cms.hymans.co.uk/media/0n2cwrhk/untapped-potential-of-pensions.pdf
Thanks for the ‘Untapped potential’ paper shout out. For ease, for others, here it is: https://cms.hymans.co.uk/media/0n2cwrhk/untapped-potential-of-pensions.pdf – and page 14 and 15 is most relevant.
I like that phrase “danger money”!
Danger money is never enough!
https://www.bbc.co.uk/news/uk-northern-ireland-65459752
Byron- thanks! It’s going to be an interesting few weeks for gilts!
I suggest you read a Nov 2019 article: New exercises in decomposition analysis by J. E. Woods in the Journal of Post Keynesian Economics, where the author decomposes the return from an investment into 3 elements: Yield, Growth, and Revaluation.
He then goes on to analyse historic trends in the UK long dated gilt market and suggests the Revaluation element is not only the most significant but has also appears to have behaved irrationally. He concludes that this is likely to create problems for pension schemes.
The implications for pension schemes he concluded were:
• The Pensions Regulator’s preference for Gilts over Equities may not be justified given current market conditions.
• Negative real returns on Index-Linked Gilts challenge the notion of them being low-risk assets.
• The analysis suggests that the focus on asset-liability matching may lead to adverse impacts on employers’ sustainable growth.
• A shift in regulatory policy may be necessary to address the financial costs associated with mandated Gilt purchases.
The situation may have changed since 2019 but I think the messages still have to be considered.
Nice reference to the JWAL paper👍Good reading for anyone interested in the actual long term funding of pensions, rather than the mass selling of short term fee generation products we see so much of.
Pensions Oldie is right that the Woods decomposition analysis focuses mainly on the period 1976-2018, which is a pity that it does not extend to more recent years with rising yields.
But the paper does attempt to address that by looking at earlier periods from
1955 to 1975…
“… Rising yields will cause capital losses, which will be of little consequence to those who bought Gilts to match liabilities.
“However, those who bought in anticipation of falling yields will see their funding position deteriorate, most likely leading to further cash calls on the sponsoring employer as part of a deficit-reduction program. “
…
“We open a brief parenthesis to discuss empirically a scenario of rising inflation, recognizing that reliance on past experience is unreliable because current Gilt valuations are unprecedented.
“Our chosen period of analysis, 1976–2018, can be regarded as one of declining and reasonably steady inflation.
“For a period of increasing inflation, we might refer to the previous quarter-century. Selecting successive decennia ending in 1965 and 1975…
“By way of background, the Gilt Yield rose from 4.4% in 1955 to 6.2% in 1965 and then to 14.8% in 1975 (all year-end values); and price inflation was 2.9% p.a. in the first decade, 9.4% p.a. in the second.
“These two decades of rising inflation were characterised for Gilts by increasingly negative Total Real Returns [-1.0% pa and -5.4% pa], higher Income Yields [5.5% pa and 10.0% pa] and increasingly negative Growth [-2.9% pa and -6.2% pa] and Revaluation Effects [-3.4% pa and -8.3% pa]
“By contrast, [UK] Equities produced positive Total Real Returns [7.3% pa and 0.1% pa], however marginal in the second decade.
“Insofar as we might use the decennial inflation rate as a criterion, the first decade [1955-1965] might have some relevance to current conditions because the most recent decennial [2008-2018] inflation rate is 3.0% p.a.”
Dr Woods’ source for the 1955-75 data was Barclays Capital’s Equity Gilt Study 2015.
Is jamdoc and jnamdoc the same commentator?
Thanks Oldie – I am learning as I scroll through these comments!
Presumably if there are more short-dated gilts being issued and fewer long-dated gilts, the so-called “duration match” of DB pensions liabilities will be harder to achieve?
Reinvestment risk when shorter dated gilts mature will also increase?
Are gilt yield- relative discount rates still justified if the volumes available in markets are significantly different in proportions to the term of DB future liability cash flows?
Perhaps some of the actuaries who follow these blogs would like to comment, please?
Byron, how can you and Derek have such insights and not be actuaries? Whoops – I discover Ros is writing with equal authority!
Hi Henry
We have been warning of the damage to gilt yields being done by DB pension scheme buyouts and QT. I have called for the Bank of Englan to put its QT gilt sales programme on hold for at least the rest of this year, which will curtail some of the selling pressure. But there is a real problem from DB scheme buyouts. For the past few years, DB schemes were buying gilts in their ‘de-risking’ exercises to prepare for buyout. Insurance companies give better prices and are more likely to quote or offer a buyout, if the DB scheme holds plenty of gilts. So these DB schemes, during the QE years up to around 2023, have been competing to buy gilts with the Bank of England’s QE programme and were adding to the downward yield pressures. The charts show that, before QT started, UK gilt yields were towards the bottom of the international pack, but once QT started, and post-Truss, they have risen above the others. A significant contributing factor (on top of loss of confidence in UK Government policymaking) is that when the insurance companies take on DB assets in the buyout, the insurer immediately sells the gilt holdings and switches into higher expected return assets! So, having competed to buy gilts with Bank of England buying during QE, DB assets are now competing on the other side to sell gilts, alongside the Bank of England QT sales. This is obviously a simplification, but the trends and directions of travel are the drivers of the higher long bond yields for gilts, especailly in the 10 year plus range.
There is sadly no mechanism for the DMO to simply “cancel” some of the Bank of England’s holdings, as happened with gilts “taken over” from the Royal Mail pensions in 2012.
The Bank of England’s gilts holdings are of course managed through its own operations, separate from the DMO’s issuance activities.
Ros, you should watch Mcgrath’s onslaught on the nonsense you highlight. https://henrytapper.com/2025/05/28/mcgrath-keeps-actuaries-honest-warning-blunt-video-inside/
This demand side argument resonates, Ros.
What makes it even worse (!) is the supply side. That the gap between spending and revenue raising for government is high, taxes as proportion of GDP are where they were in the 70s and the trajectory from here is for further supply of gilts to meet the gap. See chart 1.1. from this, which is scary: https://obr.uk/docs/dlm_uploads/Fiscal-risks-and-sustainability-report-September-2024-1.pdf
And yet the solution is productivity increases / growth.
BUT that requires investment. In a fiscally constrained environment…
Disconnecting pensions from the economy and enabling UK to borrow and live beyond our means (buying gilts in a price agnostic way) has led to a problem. The GFC exacerbated it for sure (QE). But pensions can be part of the potential solution in the exact opposite way: reconnecting pensions with productivity and the economy.
I look forward to discussing!
Calum
I hope Ros will join a Pension PlayPen coffee morning- perhaps the two of you!