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The happy Bank of England pensioners
For pensioners and those approaching retirement in the private sector, the past few years have been worrying in the extreme. The Bank of England’s policy of depressing interest rates and gilt yields has resulted in a sharp drop in the value of annuities while the National Association of Pension Funds believes that QE has cost pension funds £270 billion.
Various officials at the Bank of England have scoffed at the concerns of the pension industry, saying that the assets of pension funds have been doing very nicely, thank you. And in the case of the Bank of England’s own pension fund, that would certainly seem to be true. But then it is a very untypical pension fund.
In 2007, the average pension fund had over half of its portfolio invested in equities. Not so, the Bank’s fund, which sold its entire 21.6% holding of UK equities late that year, coincidentally avoiding a precipitous crash in the stock market as the financial crisis hit. The fund moved heavily into index-linked gilts, which protect against rises in inflation. From a proportion of 25.6% in index-linked securities in Feb 2007, it rose in successive years to 70.7%, 88.2% and 94.7% with a figure of 94.8% in February 2011, the last period for which we have details.
According to a report from NYB Mellon earlier this year, UK pension funds in general have almost tripled holdings of index-linked gilts to 15% over 10 years “reflecting the heightened concern over the future path of inflation”. The Bank of England has never revealed why, instead of the industry average of 15%, their pension fund holds an extraordinary 94.7% in index-linked securities and have no equities whatsoever, when the average holding is 45%.
The mysteriously growing pension pots
Each year in its Annual Report, the Bank of England publishes details of its top executives’ pensions. In February 2005, the then commoner Mervyn King had a pension pot of £2.7 million. It rose to £5.4 million in February 2009 at which point contributions ceased, meaning it is no longer shown in the Report.
Deputy govenor Charlie Bean saw his pension pot rise from £1.3 million in February 2008 to £2.5 million in February 2011, helped by two consecutive rises of half a million pounds. For the year to February 2012, however – figure revealed just last night – it has grown by over a million pounds to stand at £3.6 million.
The other deputy governor, Paul Tucker, saw his pension pot increase from £2.3 million in February 2009 to £5.0 million in February of this year, a rise of £1.3 million in the past year alone.
According to the Daily Telegraph, “Bank sources said the largest part of the increase was due to the sharp fall in gilt yields.” Really?
In three years, Bean’s pension pot has grown by 118% and Tuckers by 148%. Both rises appear to be far in excess of the gains in gilts. Given that they are public servants and that their pension funds are paid by the taxpayer, surely we deserve to be given more details of why the pension pots of the Bank’s senior officials have risen so much in the past few years. It is not good enough merely to show the figures as a footnote in the Annual Report.
The Libor scandal
When Bob Diamond testifies tomorrow to the Treasury Select Committee (before applying for his Jobseeker’s Allowance), everyone will be agog to hear more about his conversation with the Bank of England’s Paul Tucker about the Libor interest rate. In new revelations from the Daily Mail, Baroness Vadera, one of Labour’s chief economic advisers, wrote a paper in 2008 headed “Reducing Libor” which said that reducing the inter-bank lending rate would be “a major contribution to the stability of the banking system and to the health of the economy.” This would presumably have been seen not only in the Treasury, but also at the Financial Services Authority and the Bank of England.
Last week Sir Mervyn King called the Libor revelations a “deceitful manipulation of one of the most important interest rates.” Any inquiry must discover whether the banks alone were involved or whether depressing Libor was done at the behest of the government and the financial authorities. Dan Congahan, author of Inside the Bank of England, has apparently said that it is “not credible that the Bank was not aware of the recalibration of Libor.” The consequences for the reputation of Britain’s financial industry – and indeed the government – could be horrendous.
As more details emerge, Britain’s savers will no doubt be keen to learn if massaging the Libor rate has mean that the rate paying on savings has been lower than it otherwise might been. If so, will savers have any chance of redress?
We’re not all in this together
How can the MPC possibly appreciate the true consequence of depressing interest rates and gilt yields through Quantitative Easing when it is so comfortably insulated from the realities of life by its remarkable and untypical pension scheme? Would it not be much better for the country at large – and the MPC’s own credibility – if its members were required to have private pensions?
And should the same not apply to MPs? No wonder they do not regard fixing the private pension system with any degree of urgency when they have such gold-plated pensions?
We keep being told that we are all in this together. When it comes to pensions, that is very much not the case.