Sunday, April 29, 2012

Pension insanity

You will buy more Govvies, or else

Private pension schemes are obliged to match liabilities. As yields are pulled down, these private schemes are obliged to purchase more. Effect is to transfer investment funds to government, and also shift -private- pension funds to unfunded government dependent. This is effectively transferring funds out of private companies for the immediate consumption by government. Our government is going through all reserves of capital and replacing with government IOU s. The article doesn't directly state this, but if gilts collapsed, then suddenly UK companies with pensions have to direct even more funding to the government ! This is perverse, the less and less valuable something becomes, the more you are legally obliged to buy...right up to when the pension schemes collapse the host company.

Posted by stillthinking @ 05:17 PM (1700 views)
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7 thoughts on “Pension insanity

  • stillthinking says:

    I couldn’t fit it all in…

    This seems like a situation that gets more and more fragile until one single event crashes everything. The solvency and ability to invest of many UK companies seems to also depend perversely on gilt yields remaining low. Maybe the auto-enrollment system, itself requiring additional contributions from the employer, is an escape route from QE i.e. QE or something to take its place is now required to avoid the whole caboodle collapsing.

    This does look a bit like just plain state confiscation. There is no proposal or dynamic for even holding the obligations steady! Let alone stop them rising.

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  • How many companies still have defined-benefit pension schemes? Most new entrants are being put on defined-contribution schemes, which have no obligation to buy gilts. How much money is there in the existing pot of defined-benefit pensions?

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  • mark wadsworth says:

    ST: ” if gilts collapsed, then suddenly UK companies with pensions have to direct even more funding to the government!”

    Superficially yes, but if gilts rose, that would be the flipside of interest rates going up; and if interest rates go up, the NPV of future pension liabilities goes down, so the amount of assets a pension fund needs to hold goes down as well in equal and opposite measure.

    D, very few, is the answer to that.

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  • general congreve says:

    Right on cue! markj69 str05, if you’re reading this, then I recommend reading the article, with reference to our conversation on Saturday night.

    @3 – Gilt prices being inversely related to interest rates is one thing. The fact you won’t get a real rate of return from the government on your gilts if the interest rate is negative in real terms (which it is), is another thing. And the fact that if you are paid a real rate of return on your gilts (i.e. the interest rate is put up above the rate of inflation), the government will go broke and gilt holders will get sweet FA (unless we have a spectacular and sustained period of economic growth to offset the government’s outgoings on gilts at those rates), is yet another thing.

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  • stillthinking says:

    http://www.ft.com/intl/cms/s/0/93d1585e-3dbb-11df-bdbb-00144feabdc0.html#axzz1tOrRDeGZ

    Two years ago they are 90 billion short. 3K per UK worker. I almost don’t want to look at the situation now (can’t be bothered) but its worse. But it isn’t the liabilities that is the problem. Its the assets being themselves IOUs. If there are 500 billion, assuming (for no reason) 50% in gilts as not unreasonable. Then the government spend on just that is 300 billion. They don’t have it, there is no way that they have access to this funds. The debts are currently ballooning off out of control even -without- this.

    The problem, the scam, is that we treat IOUs in the same way as a real asset once the abstraction of valuation is put on. This is not even the whole problem, we also have unlimited repos on IOUs. Where is the actual capital? This an insane house of cards IMO. You get to the point presumably with careful handling where if underlying asset values (IOUs….) fall even by 1% the whole financial system collapses in bankruptcy. It is bloody scary. I hope I am being paranoid. Additionally, who is going to be stupid enough to join the auto-enrollment to let us out of QE!?

    The Tory plan was for growth to absorb the unemployment of a reformed state sector. Without that growth, there is no Tory plan capable of winning the next election.

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  • stillthinking says:

    You may also be interested in this

    http://en.wikipedia.org/wiki/Control_fraud

    and related links. Because the financial system did not get gutted by accident, which is why Gordon Brown with his “reorganisation” of the regulatory authorities despite being a fool was such a disaster.

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  • general congreve says:

    @5 – Well said. An insane ponzi scheme, if ever there was one.

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