Causes of the Crisis-in the pension world
The traitors in govt and ofcourse the EU-
read highlighted section below
Causes of the Crisis-
read below esp the highlighted section
The EU's pensions policies also explain a lot of our difficulties.
In stark contrast to the euro countries, Britain has a potential source of finance, which if properly invested could act as a springboard to restore national wealth creation.
Britain has 75% of the EU's total occupational pension scheme assets, amounting to approximately ?750 billion.
This occupational wealth, created by past and present generations, has been put aside to pay present and future pensions, and represents the equivalent of 81% of Britain's Gross Domestic Product (GDP).
By comparison, occupational pension provision in Germany represents 16.3% of its GDP, with equivalent figures for France at 6.6%, Italy at 2.6% and Belgium at 5.9%.
Already, Britain's pension funds hold record levels of overseas stocks and shares.
The average fund now has 28% of its assets invested elsewhere with some funds having as much as 50%. In the meantime, our country is in desperate need of investment.
Now the EU wants to grab the rest by further liberalising national investment rules for pension funds and enabling multinationals to provide unified pension plans for their staff, reducing costs by millions per year.
The EU Directive on pensions, by enabling a financial institution in one member state to manage company pension schemes in other member states, will simply result in the exit of more capital from this country.
When you look at why the cost of occupational pensions has increased by some 50% over the past eight years the picture becomes clearer.
This has not come about by accident or because workers are living a couple of years longer during retirement, instead because it has been planned by the Treasury.
In 1995, the Treasury, then run by the Tories, decided that to help meet the EU convergence criteria, (required by the Maastricht Treaty to begin preparations for the euro), the issue of Government debt through the UK financial gilt market should cease.
A gilt is a promise by the Government to pay interest on a loan, which it has raised from the capital markets, with the loan becoming fully repayable at the end of an agreed period i.e. gilt-edged security.
At the time, the Government said that it was reducing the National Debt.
What it really meant was that the Government was no longer able to help finance its revenues through the issue of new gilts because it would contravene the parameters laid down by the EU on borrowing.
The result was that the supply of new gilts ceased, whilst the financial demand for gilts increased, especially for 15 year and 20 year Government gilts, which have always been ideal financial instruments to underpin occupational pensions whilst in payment.
This is because people retiring at age 65 tend to go on living for a further 15 to 20 years.
So gilts with a 15 or 20 year term are ideal security to underpin the financial liability of an occupational pension becoming payable over the same period.
Unsurprisingly (supply and demand) the price of the remaining gilts issued in the market prior to 1995 have since rocketed, to the extent that the cost of, for example, a subsistence level of pension of ?7500 per annum payable to a male aged 65, now requires at least ?100,000 of capital to match the financial liability whilst in payment.
The policy of no longer issuing new Government gilts has continued since 1997 and so it is small wonder that the cost of pension final salary guarantees has increased in the manner they have.
By the same token, the Equitable Life insurance company problems also originate from the same shortage of available gilts whereby they cannot now meet the cost of matching the 4% annualised guarantees under their insured policies because gilt prices have rocketed.
This has led to the same insolvency problems as experienced by our pension funds.
Who would have thought in the 1970s and 1980s when the Equitable Life sold these policies that an underlying 4% capital guarantee would render it insolvent in 2002?
This is not a pensions crisis; it has been planned since 1995 as part of the drive to Europe.
Further evidence of this comes from what is known as the Minimum Funding Requirement (MFR to the Treasury wonks) introduced by the Tories in April 1997 but conceived in 1995 at the time the Treasury decided to dry up the gilt market.
The MFR is a Government prescribed method of measuring the solvency margins of an occupational final salary pension fund.
It was put in place to gauge the impact that the Government's reduced borrowing requirement would have on our pension funds. In other words: create a problem, measure it and then call it a crisis.
Since 1997 the MFR has identified huge deficits in occupational pension provision.
Once identified, the employer then has to make good the deficit by paying in large amounts of capital to make up the shortfall.
In practice, what happens is that the MFR acts as an excuse for the employers to wind up their final salary pension commitment.
This makes the MFR a convenient hiding place for the employer.
It is also a distraction away from the government's failure to issue gilts, and shifts attention from the fact that throughout the 1980s and early 1990s employers were boosting their profits by taking surpluses from our pension funds.
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Issue of gilts to remain 'skewed' By Tom Stevenson
Last Updated: 2:24am GMT 16/03/2007
City minister Ed Balls said the government would continue to feed the pension industry's insatiable hunger for long-dated government securities by 'skewing' the issue of gilts towards long-dated and index-linked bonds.
Speaking to the annual conference of the National Association of Pension Funds in Edinburgh, Mr Balls (pictured) said: "I can see that underlying conditions, notably the shape of the yield curve and strong demand for long-dated and index-linked gilts, are very similar to a year ago and also seem likely to be sustained over the medium term.
My conclusion is that our policy of skewing issuance towards long-dated and index-linked gilts is the right policy and will continue."
The government will announce the planned breakdown of gilts issuance by maturity as part of next Wednesday's Budget. advertisement
Chris Hitchen, chairman elect of the NAPF, said: "We welcome the announcement but they will need to maintain or increase the issue of long-dated gilts for a long time to make a difference. It won't solve our problems in one year."
At a combined £42.6bn, the issue of long conventional and index-linked bonds in 2006-7 has been the highest since the Debt Management Office was established in 1998.
There is enormous demand from insurance and pension funds for long-dated bonds, which they use to match their assets to their liabilities, which can extend years or even decades into the future.
A shortage of suitable long-dated government securities has forced the price of gilts higher. That has pushed down the income yield offered by the bonds, which has in turn increased the liabilities they are designed to match and led to yet more demand from long-term investors.
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How Britain was caught in a jasmine-scented trap
By : Bill Jamieson January 22, 2006
BRITAIN'S ever-deepening pensions black hole is set to erupt in a big political row for the Treasury as fund managers, regulators - and tens of millions of savers - watch helpless and bewildered at the unfolding crisis in the government gilt-edged market.
The storm threatens to dwarf the pensions mis-selling and with profits shortfall scandals of recent years - though this time around with the government and the regulatory industry in the firing line.
For anyone saving through a company pension scheme or long-term with-profits insurance company fund in Britain, the extraordinary events of the past week have made for especially grim reading.
Far from the pensions "black hole" receding with the recovery in stock markets, it grows alarmingly deeper as yields on long-dated gilt-edged or government stock have fallen.
The fall in bond yields has been worldwide. But in the UK the falls have been much greater.
Last week, the real yield on the 50-year index-linked gilt slumped to 0.57% - below that of an index-linked bond in deflationary Japan.
In this surreal terrain, pension-fund managers have been caught in a vicious circle: they are obliged by regulation to reduce risk exposure by more closely aligning assets against liabilities.
This means more investment in long-dated gilt edged stock for the greater certainty of returns, and less in volatile equities.
But the greater the investment in long gilts, the further that yields have fallen - and the greater that pension deficits have grown.
Put another way, the more the fund managers seek to fill the hole, the bigger it gets.
The result is akin to a demented Doomsday machine in a sci-fi horror movie.
Pension deficits of FTSE 350 companies have risen by £20bn (E29.2bn, $35.4bn) this month alone, while the pension fund liabilities of companies in the FTSE100 are reckoned to have leapt by £35bn in the past six months.
This is despite a recovery in pension savings and a strong rally in the stock market that has swept up the FTSE100 Index by more than 60% since March 2003.
Savers are now aghast that while stock markets have risen sharply, the ability of their pension funds to deliver on their promises has declined.
Fund manager F&C says the crisis could raise the average pension fund deficit by more than half.
According to Jeremy Toner, fixed-income portfolio manager at Investec, the herding of pension funds into the long end of the index-linked market "has created a bubble and arguably a disorderly market which is forcing pension funds into uneconomic investment decisions".
The bubble, he believes, "will eventually burst when pension fund demand for bonds falls as it is generally expected to do over the next decade".
he potential political fallout is colossal. Not only are spiralling pensions deficits creating huge uncertainty in corporate Britain, with company mergers made much more complicated and efficiency gains more than wiped out by widening pension liabilities, but the incentive to save is also being hit.
The list of UK companies closing or modifying their pension funds grows with every week.
Retail group John Lewis and brewer Scottish & Newcastle are the latest to announce cutbacks to previously agreed pension benefits.
And with no light at the end of the tunnel, pressure on the government's Debt Management Office (DMO) is set to grow. Says Paul Rayner, portfolio manager at Royal London Asset Management: "Demand from UK pension funds will increase. Deficits will grow as liabilities are discounted at historically low interest rates.
The DMO has a responsibility of maintaining an orderly market, but the situation has been exacerbated by the fact that there will be no long-dated conventional supply until the end of February."
How did Britain get into this tangle?
Why have long-dated gilt yields fallen further than in other countries?
And what should be done?
Low bond yields have become a familiar part of the global financial landscape.
Falling prices for manufactured goods from Asia, particularly China have helped to pull down inflation and interest rates round the world.
But what has puzzled many, all the way up to former US Federal Reserve governor Alan Greenspan, is the "conundrum" of low yields on long-dated bonds.
A benign interpretation is that financial markets now have unbounded faith in central bankers to keep inflation down in the longer term.
Altogether less benign is the classical interpretation: that low long-term yields signal very little confidence at all in the future and the onset of recession - or depression. Low US yields may be explained by the popularity of US bonds with Asian investors.
But what explains the position in the UK where long real yields have fallen below those in France and the US?
One potent factor playing on the UK pensions and long-term savings market has been the growing influence of the regulators. Institutions are now obliged to mitigate performance volatility by investing in fixed-interest securities.
This phenomenon was best exemplified by insurance giant Standard Life.
Its huge with-profits fund had been caught overexposed to equities at the top of the market in 2000. Policyholder bonuses were cut as the market fell. Standard Life was then "encouraged" by the Financial Services Authority to switch out of equities into fixed-interest stocks.
This it did in dramatic fashion. In January 2004, in a secret operation code-named Project Jasmine, it switched £7.5bn out of equities and into bonds.
It was the biggest single such asset shift ever undertaken by a UK institution. Other companies followed, though not in a move of such magnitude. Project Jasmine did not leave the with-profits fund smelling any sweeter for the policyholders.
In fact, it had the effect of compounding the error of being over-exposed at the top by selling out of shares when the market was low.
The FTSE100 has since recovered strongly. But Standard Life policyholders have continued to suffer bonus cuts.
Similar pressures have been evident on pension funds, and with equally perverse results. Says Toner: "The need to meet regulatory requirements and avoid risk-based levies drives companies to reduce the volatility of their pension-fund deficits by buying long-dated index-linked bonds regardless of their investment merits; this real yield is then itself used as the rate to discount future pension-fund liabilities, which therefore rise, thereby forcing more investment into long-dated index linked bonds."
This is an extraordinary state of affairs for which the regulatory agencies and the government are largely responsible.
The DMO can issue more long-dated debt and/or shift the maturity of the government's own debt pile.
But fund managers must be allowed greater discretion in asset allocation.
To have today's perverse situation where pension funds are required to invest in assets against their own interest and common sense is surely no way to manage Britain's pensions industry.
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