Bank Of England insider trading

mwpt

The title is designed to be leading. But I came across a blog which has the following to say. I'm just wondering if anyone has more info, or knows a bit more about pension funds and could say if this is actually quite unusual. It does seem odd to me that most other funds lost money during the GFC while BoE made by moving into gilts.

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%.

Generali

mwpt wrote: »

The title is designed to be leading. But I came across a blog which has the following to say. I'm just wondering if anyone has more info, or knows a bit more about pension funds and could say if this is actually quite unusual. It does seem odd to me that most other funds lost money during the GFC while BoE made by moving into gilts.

They weren't the only ones to do it. Boots put all its pension scheme into bonds some years earlier:

http://www.theactuary.com/archive/old-articles/part-5/why-move-to-bonds-3F/

The simple answer is no, the BoE weren't front running the entire economy.

I'm pretty skeptical of the figures as no source is given for many of them but I will say that, assuming the bit taken from the BoE's annual report is true and this is the article you are meaning to link to:

http://www.saveoursavers.co.uk/bank-of-england/the-happy-bank-of-england-pensioners/

the BoE get final salary pension schemes. The way that net present value calculations work, the lower the interest rate the higher the net present value of a final salary pension scheme.

Think of it this way. If I have a contract with you to pay you £1100 in 1 year and interest rates are 10% then I need to put £1000 in a bank account today in order to give you your £1100 in a year.

If, however, interest rates fall to 0% then I need to have £1100 in the bank today in order to give you £1100 in a year.

Similarly, if interest rates increased to 100% I'd only have to put aside £550 to make good on my promise.

Net present value calculations work in much the same way. You still get your £1100 in a year but the amount I need to put away changes with interest rates.

An annual report will need to show the net present value of the pension promise that has been made. That number has increased as interest rates have fallen but the actual amount of pension that Mr King et al will get has remained unchanged.

HTH.

Malthusian

Surely those with Bank of England pensions don't give a stuff about what the Bank of England pension fund is worth, as if it's insufficient to pay the promised final salary pensions (due to poor investment decisions or any other reason), the money will be extracted from taxpayers instead. Like any other public sector scheme.

If BoE officials actually knew when the market was going to crash they would have insider-traded with their own money, not the pension fund, as doing so would actually make them richer.

mwpt

Thanks Generali. I did sound a bit like a typical internet conspiracy theory, but my starting assumption is that most government function is corrupt at some level, so wouldn't have surprised me.

Malthusian, I assumed that if this was front running BoE decisions it would have been done by the pension fund managers (not officials) who were aware that bonds would soon be booming due to upcoming lowering of rates and asset purchase schemes (QE).

Generali

Here's the BoE pension trustees' report:

http://www.bankofengland.co.uk/about/documents/humanresources/pensionreport.pdf

The investment managers are Legal and Generali (:)) and it seems unlikely that the BoE has been feeding L&G inside information without any of it getting out.

It does seem that our blogging friends are right, that the BoE Pension Scheme is invested solely in bonds. Up until now that has been Gilts but it looks as though the universe has been expanded to cover other bonds with an explicit Government guarantee (e.g. Network Rail) (see p.11 for the investment strategy).

I infer from the strategy that they seek to hold bonds to maturity or hedge interest rate movements if they are looking to sell prior to maturity (p11). That would mean that while buying bonds in advance of a rate cut would show an increase in asset values, that would never be realised because of the hold to maturity strategy.

mwpt

Ah. Well, one of my pensions is with L&G and didn't do nearly so well in the GFC. Hrrrmph.

Generali

mwpt wrote: »

Ah. Well, one of my pensions is with L&G and didn't do nearly so well in the GFC. Hrrrmph.

Perhaps you should get a job with the Bank of England!