A couple of weeks ago, Bank of America Merrill Lynch put out a research note titled: “The Silver Economy — Global Ageing Primer”. The document, by equity strategists Beija Ma, Sarbjit Nahal and Felix Tran, is long. Really long. Like, 232-pages long. And people are scared they might be subsumed into the silver economy before they finish it. *opens note on global ageing* *discovers it's 232 pages long* *considers whether life is too short* — Richard Barley (@RichardBarley1) May 20, 2016
Here’s an odd argument the Bank of England is somehow to blame for BHS’s massive pension hole. This is the key bit: The investment environment fundamentally changed post-2008. To keep the UK economy liquid in the crisis, between August 2008 and March 2009, the Bank of England cut the base interest rate from 5% to a record low of 0.5%, where it has stayed ever since…The problem arises in the difference between the amount of money set aside to cover eventual pensions and the obligations. The entire DB scheme is a bet that today’s investments will always come good, forever, and cover tomorrow’s guaranteed payments. Schemes had been banking on annual returns from their investments of at least 5%. Suddenly, with low interest rates, and stocks going through the post-crisis trough, it’s down to 0.5% as a base. That means they have to put up a lot more new money to get the returns they need. Contrary to what’s implied in the piece, it’s quite simple to manage a defined-benefit pension properly — especially if most of the beneficiaries are already retired. The level of interest rates only matters if you’re doing it wrong.
Creakier than sovereigns’ long-term pensions liabilities? Sub-sovereign ones, possibly. A new piece by Moody’s lands, looking at the problem among the regions and cities of four countries otherwise rated Triple-A: Australia, Canada, Germany and the United States.
RIP old RPI!? Nah, we’ll just stick with the old Retail Price Index formula said the National Statistician on Thursday morning, surprising just about every analyst in our inbox and making holders of index linked gilts pretty darn happy. Yields have fallen by between 22bps and 38bps across maturities at pixel. The ONS had four options to choose from, moving from ‘no change’ to the RPI through to ‘lots of change’. Each choice would have involved the Carli index, that most prettily named devil, which isn’t used by any other advanced economy’s statistical measures due, primarily, to its large upward bias. But, obviously, it still persists within the RPI where, according to estimates, it was worth nearly a 1 per cent bump in the measure per year.
Some highlights from Monday’s FTfm. Delistings worry for managersDelistings from exchanges in Greece, Ireland and other peripheral eurozone states could deter fund managers from buying into companies in those countries, equity investors have warned. Impact investing forecast to doubleTake up of “impact investing” among UK pensions funds is set to double within two years, with nearly half of schemes planning to put money behind socially beneficial initiatives such as green energy, social housing or microfinance.
Some highlights from Monday’s FTfm. Dutch funds cutting pensionsMore than 80 Dutch pension funds will have to cut payments to pensioners for the first time ever from April next year, unless they can improve their financial situation. De Nederlandsche Bank, the Dutch central bank, has mandated that pension fund assets must equal at least 105 per cent of liabilities by the end of 2013.
Greek cabinet ministers are meeting later today to finalise how they’re going to come up with €11.5bn in savings over the next two years as demanded by the Troika. Unsurprisingly, the most contentious and sensitive part is the €1.5bn in pension and wage cuts that are needed. From the FT:
Okay. It’s true. We’ve become slightly obsessed with negative yields at FT Alphaville. Especially with regards to what they signify for the financial industry. Though, for a long time we’ve felt very much alone with this obsession. Weirdly enough, nobody else has seemed too bothered about it. (Note, we even had to go to the ECB directly to ask Draghi what he thought about it.)
It’s been puzzling me since the start of the financial crisis: why can incontinent governments like, say, the UK’s, borrow almost unlimited amounts at interest rates far below inflation? Stephen King at HSBC has been thinking about this, and has come up with a suitably apocalyptic (he has a reputation to defend, after all) explanation for the silly prices of government debt. Rather than addressing the problem of too much of it, he points out that governments across the West are instead finding ways to force it down the buyers’ throats regardless of the price. Sadly for the struggling members of the eurozone, they can’t pull off this trick because they don’t control their domestic currency, but the proud printers of other major currencies are pulling it off like mad.
It’s all about stock-flow adjustments, or SFAs — the curious cases when a government’s stock of debt increases without a corresponding change in its deficit to explain it. Attached to its most recent release on EU debt and deficit numbers, Eurostat has penned quite an interesting note on how these SFAs work (while pointing out that SFAs “have legitimate accounting explanations”). Hat-tip the WSJ’s Charles Forelle.
The FT reports that corporate pension shortfalls have increased by an additional £90bn since theBank of England resumed gilt purchases last October in an effort to drive down interest rates, according to an employers’ body. The National Association of Pension Funds said the impact of the Bank’s quantitative easing policy, aimed at kick-starting the economy, had been worse than expected since it was launched in March 2009. “Businesses running final salary pensions are being clouted by [QE],” Joanne Segars, NAPF chief executive, said in a statement marking the policy’s third anniversary. “Deficits that were already big now look even bigger because of [QE’s] artificial distortions.” According to the Pension Regulator, the national shortfall for corporate schemes stood at $470.7bn as of March 31, 2011.
Charlie Bean of the Bank of England (deputy governor, monetary policy) has been brave enough to visit Glasgow, telling the Scottish Council for Development and Industry about his quantitative and the economic outlook. Beyond the colour of explaining how the same man who founded the Bank itself (William Paterson, in 1694) managed to half-ruin Scotland through a madcap Panamanian trade scheme and help force it into union with England, Bean touches on the oh-so-raw modern issue of British pensioners and other conservative savers having to pay a painfully direct price for the antics of our bankers.
All remaining defined benefit pension schemes in the UK will be forced to close and many businesses pushed into insolvency if European proposals to strengthen company retirement plans are put in place, influential employers’ and labour groups have warned. The FT says in a letter to be sent on Monday to senior European commissioners, the heads of the National Association of Pension Funds, the CBI and the TUC labour union group warned that the plans will have disastrous consequences for companies and employees. “By demanding dramatic increases in funding from employers, the Commission’s plans would – at best – force all remaining defined benefit schemes to close and – at worst – push many businesses into insolvency, leading to significant job losses,” they wrote.
US blue-chip companies face a hit to earnings from greater pension contributions, with charges related to rising liabilities pushing groups such as Verizon and US Steel into losses during the fourth quarter, says the FT. The funding gap for pension plans of S&P 500 companies almost doubled in 2011, analysts say, to around $450bn, as bond yields dropped, causing the size of future liabilities to grow. Stock market performance has also failed to keep up with rising liabilities. “In addition to higher contributions this year, it looks like pension funding may become more of an ongoing drain on cash than it has been in the past,” said David Zion, head of accounting research for Credit Suisse. He estimates that S&P 500 companies will have to contribute $90bn to their pension plans in 2012, a rise of 74 per cent on planned contributions for 2011.
American Airlines parent AMR said on Wednesday it will seek to cut 13,000 jobs and terminate pensions in pursuit of $2bn in annual costs savings, reports the WSJ. The company said it wants to reduce labor costs by $1.25bn a year, or 20 per cent. That includes cutting its workforce by nearly 15 per cent, imposing new productivity measures and outsourcing some work. The company also aims to terminate its four underfunded pension plans, a move that would represent the largest pension default in US history. To enact the plan, the company must convince the US Bankruptcy Court that it cannot successfully restructure without these measures. AMR also needs to win approval for the desired pension terminations, over what is expected to be fervent opposition from the Pension Benefit Guaranty Corp.
Large US public pension plans are pouring more money into private equity funds, the WSJ reports. Big public employee pensions had about $220bn invested in private equity in September, or 11 per cent of their assets, according to Wilshire Trust Universe Comparison Service, which tracks the holdings of pensions, foundations and endowments. That compares to about $50bn from a year earlier, when private equity investments made up 8.6 per cent of large pension funds’ assets. A decade ago, pensions with at least $1bn under management had just 3 per cent of their money with private equity. The report contrasts this with the criticism some public sector unions have made of private equity in the wake of Mitt Romney’s campaigning for the Republican presidential nomination, while some big public pension funds have union representatives on their boards.
Life’s a beach (or not) Ah, the holiday season. Dreams of surf, sea, sand – and soggy share prices, or so it must seem to the bewildered shareholders in Thomas Cook. The travel agent’s “amendment to bank facilities” on 21 October lasted just 38 days before the business fell into the arms of its 17 banks, who put up £200m in emergency funding to tide it over until the summer.
Trustees of the Uniq pension scheme have sold its assets and liabilities to Rothesay Life in a deal that ensures that the 20,000 members will not have to rely on the state-founded Pension Protection Fund to make up any shortfall in their retirement benefits, reports the FT, in a deal which ends years of uncertainty that could have resulted in a significant hit to the PPF. The company also used a novel so-called deficit for equity swap that is likely to be a template for other employers whose pension liabilities are worth far more than the company. Under terms of the deal struck with Rothesay Life, which is owned by Goldman Sachs, scheme members will receive benefits that are far lower than they were promised during their working lives, but as good as those provided by the PPF, according to Lane Clark and Peacock, which advised the independent trustee to the scheme. Uniq was once the owner of the UK’s largest dairy companies and many of its pensioners are milkmen who earned modest salaries.