This Friday blockbuster from Daire MacFadden and Ian Smith in London, dominates the digital front page of the FT. We in pensions know why we don’t need so many long term gilts. It’s partly that the liabilities of DB schemes decrease as they are shipped out to Bermuda via UK insurers fronting the activities of American insurers owned by American private equity houses. They don’t want Government bonds, they want more profitable bonds (for them) – corporate bonds. So gilts are being sold off prior to buy-in/out.
It’s partly too that our retirement in future will be financed from pots not pensions , so long as DC savings plans continue to hold out against CDC. CDC and DC aren’t buyers of long term gilts which leaves a few open DB funded schemes and not many pension schemes
If you want to read the article and have got this far on mine, here is a free share – it is a Friday and a holiday for many of my readers. If this link has run out, email henry@agewage.com.
If you want to read the highlights of the article – keep reading here.
As a DB pension scheme currently buying long dated gilts. we are gaining significantly from the market changes.
There are two “benefits” from our point of view – one real and one entirely fictitious.
The real one is that we are able to secure for the next 20 to 40 years an increased predictable and low risk cash income for each pound invested.
The fictitious one is that the lack of attractiveness in long dated gilts is reducing prices in the secondary market and pushing up yields. These are the yields used as an assumption about the indefinite future used to value the scheme’s liabilities. The result is an increase in schemes’ surpluses or deficits that will not match reality unless the scheme is entirely invested in matching assets and those assets are not sold before maturity.
While to some extent this could be viewed as a correction to the overstatement of pension scheme deficits resulting from quantative easing and as was clearly evidenced throughout by the FABI index. This did no good to the members or the employers who lost a substantial proportion (40%?) of scheme assets to the profit of insurance company shareholders by buying over-priced bulk annuity policies.
We do now have to be equally cautious about valuation surpluses going forward especially if a distribution of assets, either to the employer or for additional member benefits is being considered, let alone the true value of any future bulk purchase annuity policies. (The phrase “competitively priced” is being increasing used here and as always should be regarded as a warning).
Incidentally the same market distortions also apply to the future inflation assumptions used in pension scheme valuations as that is typically the difference in yield between an index linked gilt and a fixed interest gilt of the same duration. The changes to the pension scheme universe reducing demand appears likely to be exaggerated for index linkers. The resulting distortion to valuations is however currently limited by derived inflation assumptions above or close to benefit caps.