90.7% of BoE pension fund invested in inflation linked securities

[Sancho Panza]

This is part of the watch what they do, not what they say series.

Topic was raised in the Deflation/Reflation thread.

As working age households get CPIH related pay rises if they're lucky,BoE pension pot is protected against RPI levels of inflation (which is generally higher than CPI/CPIH).

DMO Index linked Gilts

' Index-linked gilts differ from conventional gilts in that both the semi-annual coupon payments and the principal payment are adjusted in line with movements in the General Index of Retail Prices in the UK (also known as the RPI). RPI data since June 1980 and full details on all index-linked gilts currently in issue are both available below. '

41 minutes ago, VeryMeanReversion said:

Interesting bits on that website e.g.

"BofE pension scheme has employer contributions well over 50% of salary:  The Bank of England scheme required employer contributions of well over 50% of salary for the year ending February 2016.  It also pays all the administration and PPF costs, on top of the employer contributions.  Such costs would be ruinous for most private sector employers struggling to fix their defined benefit pension deficits."

 

Just now, Sancho Panza said:

Worth also noting what the BoE is investing in.

90.7% of the BoE's pension pot is invested in index linkers ie protected against RPI.

Does this align about their monetary policy strategy?

Bank of England Pension report 2017

As of Feb 28 2017,asset allocation as follows

'UK index linked gilts- £ 2,694,838,000 (61.1% of total assets)

UK corporate index linked securities- £ 1,307,476,000 (29.6% of total assets)

UK fixed interest gilts £400,462,000 (9.1% of total assets)

Total assets £4.4 billion'

 

 

[Sancho Panza]

Shaun Richards posts on the issue of inflation today. His site is well worth following to learn about inflation and GDP measures.

I've highlighted,increased font size and put in bold,one of the central themes Richards does good work to highlight and that's the way housing is treated and measured in inflation and GDP data.

Only recently-I believe-did they start using the same rental equivalence measure for both CPIH and GDP.Previously-and I'm going from memory here-the one they used in CPIH was lower than the one used in GDP but I'm happy to be corrected.

Obviously, the 200% increase in the the cost of a house over the last 15 years has been overlooked by our inflation measurers-RPI only measures mortgage interest payments.

Shaun Richards 11/10/17

'The world economic outlook of the International Monetary Fund was in general upbeat and positive but I noted this.

The outlook for advanced economies has improved, notably for the euro area, but in many countries inflation remains weak, indicating that slack has yet to be eliminated

You may note that it ignores the possible link between lower inflation and better economic growth in its rush to tell us that inflation below some arbitrary target is a bad thing. It really is old era economic thinking to say that low inflation is a sign of slack in the economy as well. Missing also is any thought that growth and inflation are being measured badly and that perhaps we have more inflation ( for example by factoring in one of the largest parts of any budget which is housing) and less growth than the IMF would like us to believe.

Central banks capacity to cut interest-rates was mostly reduced by them cutting them so much already! If that was the weapon implied here why would they need to do it again? Also as we know some central banks have been willing to employ negative interest-rates. If we move on in a word of low wage growth then most people would welcome low inflation and low inflation expectations. If we put this another way the IMF is skirting over the implication below in its view on asset valuations.

What are the inflation prospects?

So far in 2017 headline consumer inflation has been really rather low. For example the CPI in the Euro area is at 1.5% and the US CPI is at 1.9%.

Food Prices

The United Nations calculates an index for this.

The FAO Food Price Index* (FFPI) averaged 178.4 points in September 2017, up 1.4 points (0.8 percent) from August and 7.4 points (4.3 percent) above September 2016. Firmer prices in the vegetable oil and dairy sectors were behind the small month-on-month rise in the value of the FFPI.

So a rise overall which is influenced by the 27% rise in dairy prices over the past year as we note the influence of the butter shortage. Mind you if you have a sweet tooth and are a Maroon 5 fan the news is much better as the sugar price has fallen by 33% over the past year.

Comment

We see that there has been a nudge higher in the beginnings of the inflation food chain over the past 3 months or so. Much of this has been the higher oil price but there have been rises in some metal prices too although not Iron Ore. However whilst the trend is low especially for this stage in the economic cycle it can still be damaging. The rising cost of one of the basic essentials ( housing/shelter ) in many places is mostly ignored and at other times claimed as growth. Secondly the fact is that wage growth is overall low too so that pockets of real wage growth are also much less abundant that we would usually expect in a boom. If the IMF gets the inflation it seems to want there is no guarantee that wages would rise as well so it would have made us all worse off.

So in essence if we look at food and energy prices they are the major players in the consumer inflation measures we have and of course the central banks and IMF try to ignore them as “non-core.” Oh well…….'

 

 

Edited October 11, 2017 by Sancho Panza

[Panda]

8 minutes ago, Sancho Panza said:

This is part of the watch what they do, not what they say series.

Topic was raised in the Deflation/Reflation thread.

As working age households get CPIH related pay rises if they're lucky,BoE pension pot is protected against RPI levels of inflation (which is generally higher than CPI/CPIH).

DMO Index linked Gilts

' Index-linked gilts differ from conventional gilts in that both the semi-annual coupon payments and the principal payment are adjusted in line with movements in the General Index of Retail Prices in the UK (also known as the RPI). RPI data since June 1980 and full details on all index-linked gilts currently in issue are both available below. '

 

 

This really should be all over the press.

They have a vested interest in keeping inflation high.

Why are the press not on tis asking the questions which need asking?????

Can anyone tweet this.

[Democorruptcy]

I was curious about what they might say, so last year I emailed the Serious Fraud Office and asked them if they thought the BoE might have case to answer with regard to insider trading. Due to the fact that they had moved their pension to inflation linked assets while warning about deflation but their policies supposedly controlled inflation and so increased their own portfolio.

They replied and suggested it had to be done via the proper channel   https://www.sfo.gov.uk/contact-us/reporting-serious-fraud-bribery-corruption They also told me that at that time they were already investigating the BoE with regard to their liquidity auctions. The link they sent me to that now states the case is closed and no crimes were committed. https://www.sfo.gov.uk/cases/bank-england-liquidity-auctions/

[crashmonitor]

It is rather sickening for the rest of us that have to live in the real world that the guys who make the decisions have their gold plated guarantees that they are not paying for. Politicians and Central bankers should be made to live in the real world and  be exposed to investment risk like the rest of us. Then they might not be so keen to play fast and loose with inflation.

Ironic that index linked gilts have done pretty well because nobody trusts these clowns to stick to inflation targets. The capital values are well above par so that when they mature, typically 2020 or 2024, they will  have lost value in real terms from the valuation today; that's the insurance premium. It's not really an investment going forward just a way of insuring that your money just loses a bit of its spending power as opposed to being completely wiped out by hyper-inflation.

The fact the that the BOE has 90% of its pension scheme in a vehicle that is certain to lose money in real terms on maturity (from hereonin) says a lot about their confidence in the UK economy.

Edited October 11, 2017 by crashmonitor

[Ah-so]

From what I understand about the Bank's scheme is that it is a career average pension scheme - obviously less generous than a final salary pension scheme but still very generous. 

The value of the annual contributions is based on what it would cost to buy that future income stream based on today's yield curve. The more lower the gilt yield, the more expensive gilts become and therefore the more they have to pay today to buy that future income. 

When gilts fall in value and interest rates rise, this contribution level will fall. 

Run of the mill Bank staff are quite poorly paid compared to the industry they are in so the generous pension helps balance things. But it is worth emphasising that the value of contributions today is only an expression of the guaranteed future annual pension that you can receive. But what the employees cannot do is receive the cash equivalent today. 

This is probably the same as any other defined benefit scheme that you get in the public sector. 

[Greg Bowman]

8 hours ago, Ah-so said:

From what I understand about the Bank's scheme is that it is a career average pension scheme - obviously less generous than a final salary pension scheme but still very generous. 

The value of the annual contributions is based on what it would cost to buy that future income stream based on today's yield curve. The more lower the gilt yield, the more expensive gilts become and therefore the more they have to pay today to buy that future income. 

When gilts fall in value and interest rates rise, this contribution level will fall. 

Run of the mill Bank staff are quite poorly paid compared to the industry they are in so the generous pension helps balance things. But it is worth emphasising that the value of contributions today is only an expression of the guaranteed future annual pension that you can receive. But what the employees cannot do is receive the cash equivalent today. 

This is probably the same as any other defined benefit scheme that you get in the public sector. 

 Exactly my Mum is a BOE pensioner and nice little pension but nothing out of the ordinary - no different to any other public sector scheme in fact seems a little on the low side for a public sector scheme 

[crashmonitor]

2 hours ago, Greg Bowman said:

 Exactly my Mum is a BOE pensioner and nice little pension but nothing out of the ordinary - no different to any other public sector scheme in fact seems a little on the low side for a public sector scheme 

The current annuity rate for a woman aged 60 buying a superannuated annuity  is 2.466%. A modest £7,000 pension would cost £284,000 to buy in the real world. Add on a lump sum and you are over 300k. BT is a prime example as to what happens in the private sector when these generous schemes are let loose, it has basically destroyed the company and the future is uncertain. good job the public sector has the back up of the tax payer.

As I stated earlier I would make politicians and central bankers have to invest in ordinary pensions then corbyn and May can destroy their own futures with inflation and taxing the Wealth Extractors in business, I guess million pound homes in Islington would still need special protection mind.

Edited October 12, 2017 by crashmonitor

[Sancho Panza]

14 hours ago, Ah-so said:

From what I understand about the Bank's scheme is that it is a career average pension scheme - obviously less generous than a final salary pension scheme but still very generous. 

The value of the annual contributions is based on what it would cost to buy that future income stream based on today's yield curve. The more lower the gilt yield, the more expensive gilts become and therefore the more they have to pay today to buy that future income. 

When gilts fall in value and interest rates rise, this contribution level will fall. 

Run of the mill Bank staff are quite poorly paid compared to the industry they are in so the generous pension helps balance things. But it is worth emphasising that the value of contributions today is only an expression of the guaranteed future annual pension that you can receive. But what the employees cannot do is receive the cash equivalent today. 

This is probably the same as any other defined benefit scheme that you get in the public sector. 

The issue here isn't whether it's a career average or final salary or whether it's proportionate to compensate for comparatively low earnings compared to other banking sector workers.

It's the fact that the BoE is telling the rest of us that there's no inflation (and overseeing a system of measurement that grossly distorts the cost of living for many demographic cohorts), and yet in terms of it's pension fund, it's actions tell us that it's number 1 aim is to mitigate inflation risk-and more particularly RPI inflation risk (as stated earlier,RPI is markedly than the CPI public sector pay is measured against).

The second issue is that the BoE has artificially driven down market rates and then used taxpayer money to plug the hole in it's liabilities.

Again, mathematically, I can't argue with their decision. I do however,think there's a clear conflict of interest when their pension fund takes none of the pain they're forcing on many other people via monetary/IR policy.

 

[Sancho Panza]

6 hours ago, Greg Bowman said:

 Exactly my Mum is a BOE pensioner and nice little pension but nothing out of the ordinary - no different to any other public sector scheme in fact seems a little on the low side for a public sector scheme 

I outline some of the issues above in my reply to Ah So.

Like many in the public sector,your Mum isn't really the issue.One Mark Carney is the price of a lot of your Mums I suspect.

Carney is in receipt of a very 'we need to keep the talent' salary.

 

[Sancho Panza]

4 hours ago, crashmonitor said:

The current annuity rate for a woman aged 60 buying a superannuated annuity  is 2.466%. A modest £7,000 pension would cost £284,000 to buy in the real world. Add on a lump sum and you are over 300k. BT is a prime example as to what happens in the private sector when these generous schemes are let loose, it has basically destroyed the company and the future is uncertain. good job the public sector has the back up of the tax payer.

As I stated earlier I would make politicians and central bankers have to invest in ordinary pensions then corbyn and May can destroy their own futures with inflation and taxing the Wealth Extractors in business, I guess million pound homes in Islington would still need special protection mind.

Some excellent points.

There are already many public sector pensions out there that are quite simply unfunded except for taxpayer backing.

Declaration of interest-I have a toe in public sector pensions,bit like Greg's Mum's .

 

[Greg Bowman]

1 hour ago, Sancho Panza said:

I outline some of the issues above in my reply to Ah So.

Like many in the public sector,your Mum isn't really the issue.One Mark Carney is the price of a lot of your Mums I suspect.

Carney is in receipt of a very 'we need to keep the talent' salary.

 

I know  Mum is still P**** off Carney stopped BOE pensioners having BOE bank accounts always fun passing one of those cheques across !

[scottbeard]

On ‎11‎/‎10‎/‎2017 at 2:03 PM, Panda said:

This really should be all over the press.

They have a vested interest in keeping inflation high.

Well not really - all it means that whatever inflation is, their pension fund will keep up with it.  If inflation is 5% it doesn't mean that they "win" compared to inflation being 2% - because yes their pensioners would get a 5% pension increase, but everything they want to buy costs 5% more as well.

[Ah-so]

13 hours ago, Greg Bowman said:

I know  Mum is still P**** off Carney stopped BOE pensioners having BOE bank accounts always fun passing one of those cheques across !

Vital cost cutting to pay his salary. After all, it's not like the Bank can print its own money, or anything. 

[Ah-so]

On 12/10/2017 at 1:39 PM, Sancho Panza said:

The issue here isn't whether it's a career average or final salary or whether it's proportionate to compensate for comparatively low earnings compared to other banking sector workers.

It's the fact that the BoE is telling the rest of us that there's no inflation (and overseeing a system of measurement that grossly distorts the cost of living for many demographic cohorts), and yet in terms of it's pension fund, it's actions tell us that it's number 1 aim is to mitigate inflation risk-and more particularly RPI inflation risk (as stated earlier,RPI is markedly than the CPI public sector pay is measured against).

The second issue is that the BoE has artificially driven down market rates and then used taxpayer money to plug the hole in it's liabilities.

Again, mathematically, I can't argue with their decision. I do however,think there's a clear conflict of interest when their pension fund takes none of the pain they're forcing on many other people via monetary/IR policy.

 

You could argue that removing any interest rate risk from Bank pensions is the most appropriate thing to do since it limits the risk of self-interest from rate setters' decisions. 

[winkie]

On 12/10/2017 at 3:22 PM, Greg Bowman said:

I know  Mum is still P**** off Carney stopped BOE pensioners having BOE bank accounts always fun passing one of those cheques across !

My Aunt a BofE pensioner was also not happy her BofE bank account was taken away from her, .... they may have known each other, small world.

Edited October 14, 2017 by winkie