Pressures on Pension Funds

Quantative Easing (creating new credit by the Central Bank) is having major effects on Pension Funds.

Let me give you a real example.

In June 2013, BT (a FTSE-100) giant, published the 2012-13 Annual Report
[http://www.btplc.com/Sharesandperformance/Annualreportandreview/index.cfm]

Look at page 25 of the annual report.

“Government bond yields have fallen since the valuation at 30 June 2011, with real yields being negative at times. This has been caused by a number of factors, including the Bank of England’s Quantitative Easing programme. If the fall in yields is maintained and reflected in the next funding valuation, due as at 30 June 2014, this would increase the value of the BTPS
liabilities”

What this is telling us, in very clear terms, as the Bank of England creates new money in the form of new credit, it is thus forcing down the cost of borrowing for HM Treasury, by reducing the yield on UK Gilts (UK Soverign Bonds), and the effect of this, is that BT’s Pension Fund run by Hermes Investment Management for example [www.hermes.co.uk] that holds UK Gilts, is getting a reduce return on its holding (investment) in UK Gilts, and this now means, the effective gives the pension fund a headache, as the investment returns are reducing, and thus increasing the overall liability.

This pressure on bond yields is resulting in pension funds globally to look for new sources of investment, which is why we are seeing pension funds and insurance companies looking to other forms of investments in alternative assets classes, such as infrastructure, long term university accomodation or raw materials like commodities. Of course QE is only one pressure, people living longer is another demand and pressure in pension funds, QE just makes the situation worse.

 

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