We'd like to remind Forumites to please avoid political debate on the Forum... Read More »
Debate House Prices
In order to help keep the Forum a useful, safe and friendly place for our users, discussions around non MoneySaving matters are no longer permitted. This includes wider debates about general house prices, the economy and politics. As a result, we have taken the decision to keep this board permanently closed, but it remains viewable for users who may find some useful information in it. Thank you for your understanding.
📨 Have you signed up to the Forum's new Email Digest yet? Get a selection of trending threads sent straight to your inbox daily, weekly or monthly!
Gilts and Final salary Pensions Vicious Circle?
michaels
Posts: 29,133 Forumite
Possibly a bit geeky, please bear with me.
Finally salary pensions must pay out an agreed sum, generally through income from Gilts as other assets are deemed too risky.
If gilt yields fall then the amount of gilts needed to buy the required pension goes up. Thus there is an unusual market where rising bond prices increases the demand for gilts rather than reducing it.
Now consider the situation where the central bank (via 'quantitative easing') is buying up new gilts more quickly than the govt is issuing them to cover its budget deficit.
In this situation it could be that gilt prices enter some sort of vicious circle spiral where pension funds obligated to buy the gilts to cover their future liabilities keep bidding prices up and yields down and thus with lower yields they then have to buy even more gilts for the next set of retiring pensioners and so on.
This is sort of OK for final salary pension holders (assuming their employers don't go bust trying to keep the pensions funded), good news for the govts debt management office and tax payers who can fund their national debt very cheaply but very bad news for money purchase scheme pensioners.
There is also the question of whether the whole system could go pop as the increasing price of gilts and limited supply eventually means it is impossible for the pension funds to cover their liabilities simply because their are not enough gilts available given how low how far negative) the yields are.
Finally salary pensions must pay out an agreed sum, generally through income from Gilts as other assets are deemed too risky.
If gilt yields fall then the amount of gilts needed to buy the required pension goes up. Thus there is an unusual market where rising bond prices increases the demand for gilts rather than reducing it.
Now consider the situation where the central bank (via 'quantitative easing') is buying up new gilts more quickly than the govt is issuing them to cover its budget deficit.
In this situation it could be that gilt prices enter some sort of vicious circle spiral where pension funds obligated to buy the gilts to cover their future liabilities keep bidding prices up and yields down and thus with lower yields they then have to buy even more gilts for the next set of retiring pensioners and so on.
This is sort of OK for final salary pension holders (assuming their employers don't go bust trying to keep the pensions funded), good news for the govts debt management office and tax payers who can fund their national debt very cheaply but very bad news for money purchase scheme pensioners.
There is also the question of whether the whole system could go pop as the increasing price of gilts and limited supply eventually means it is impossible for the pension funds to cover their liabilities simply because their are not enough gilts available given how low how far negative) the yields are.
I think....
0
Comments
-
If gilt yields fall then the amount of gilts needed to buy the required pension goes up. Thus there is an unusual market where rising bond prices increases the demand for gilts rather than reducing it.
the bond market must have some free floating investors so the general overall market should adjust. That is to say if pension funds need to invest more in x then the price of x should only go up a little as the free floating investors move from asset class to asset class
overall as the real rate of return on investments goes down, for a scheme of a given pension the savers need to put more aside.0 -
There's new issuance of long dated gilts on a regular basis. The Treasury is still having to fund the budget deficit.
Rather than pay shareholders dividends and executives obscene salaries. Companies should be upping their contributions to ensure that current and future pensioners receive what they are expecting.0 -
the bond market must have some free floating investors so the general overall market should adjust. That is to say if pension funds need to invest more in x then the price of x should only go up a little as the free floating investors move from asset class to asset class
overall as the real rate of return on investments goes down, for a scheme of a given pension the savers need to put more aside.
Total govt debt is about 80% of GDP - could we not reach the point where the entire stock of gilts (or more?!) is needed to provide the future promised income stream of annuities and final salary pensions?I think....0 -
Total govt debt is about 80% of GDP - could we not reach the point where the entire stock of gilts (or more?!) is needed to provide the future promised income stream of annuities and final salary pensions?
I dont know, how big is the pension fund industry in the UK? I think I am a member of one of the biggest in the country its fund is ~£14 billion (62% bonds rest mostly securities)
My general guess to answer your question is no. I think my pension fund funds about 150,000 people if you scale it up to 10 million pensioners that would be ~£1 trillion of which ~60% would be bonds oh and they are not all uk bonds so I dont think its likely or possible that the bond market will be saturated by pension funds.
More importantly rules are only rules while they work. clearly if the rules were that pension funds can only invest in gilts and the pension funds needed to invest more than the sum of gilts then something would give. eg they might be permitted to invest in insured corporate paper or MortgageBackedSecurities or allowed to divert more of their funds to securities or property etc. Or maybe we would see something like the government buying these securities and issuing gilts0 -
Seems I am not the first to have this thought (note this is a random google search article, I have no idea of the credibility or otherwise of the author):
https://www.linkedin.com/pulse/chasing-rainbows-jonathan-reppWhat if holding out for that dream creates a nightmare?
What if pension schemes, addicted to gilts, become forced buyers, compulsively buying more and more gilts whenever they think they can?
What if they become trapped in a vicious circle of rising gilt prices, falling yields and rising liabilities: the ultimate goal always remaining out of reach, because there aren’t enough gilts?Gilt yields – even after recent falls – remain higher than the yield on government debt in many other countries; yet Schroders believe they have already detected unusual movements in the market for index-linked gilts that they attribute to pension scheme demand.I think....0 -
we need a new way of addressing pensions
'funded' schemes are a delusion
and 'funded' scheme invested in gilts is even more delusional0 -
Seems I am not the first to have this thought (note this is a random google search article, I have no idea of the credibility or otherwise of the author):
https://www.linkedin.com/pulse/chasing-rainbows-jonathan-repp
how do they buy more and more gilts? where does the money come from? Maybe they can reallocate from a 60:40 gilts:equities to more gilts but why would they need or want to do this?
And presumably final salary schemes are getting rare so its only a temporary problem.
Maybe the pension funds need to get more innovative, send out their members free alcohol and tabaco?0 -
In this situation it could be that gilt prices enter some sort of vicious circle spiral where pension funds obligated to buy the gilts to cover their future liabilities keep bidding prices up and yields down and thus with lower yields they then have to buy even more gilts for the next set of retiring pensioners and so on.
The "next set of retiring pensioners" wont have DB pensions. Problem solved.0 -
AnotherJoe wrote: »The "next set of retiring pensioners" wont have DB pensions. Problem solved.
They are still going to want to buy annuities or stick their money somewhere 'safe' whilst doing drawdown.....I think....0 -
Total govt debt is about 80% of GDP - could we not reach the point where the entire stock of gilts (or more?!) is needed to provide the future promised income stream of annuities and final salary pensions?
Total pension contributions for FTSE companies in 2015 was around £14 billion. Remember also current contributions from scheme members pay existing scheme members benefits.0
This discussion has been closed.
Confirm your email address to Create Threads and Reply
Categories
- All Categories
- 351.3K Banking & Borrowing
- 253.2K Reduce Debt & Boost Income
- 453.7K Spending & Discounts
- 244.2K Work, Benefits & Business
- 599.4K Mortgages, Homes & Bills
- 177.1K Life & Family
- 257.7K Travel & Transport
- 1.5M Hobbies & Leisure
- 16.2K Discuss & Feedback
- 37.6K Read-Only Boards