So, he’d have everyone using 1% bonds to save for their pensions.
What has happened to pension fund deficits as yields rose? The present value of the liabilities have collapsed. Asset values have hardly flourished, but they have fallen less than the present value of liabilities. The net result is ballooning surpluses all around. According the PPF, around half of DB pension schemes had surpluses (valued as per section 179 of the Pensions Act 2004) at the end of the first quarter 2021; that proportion rose to 85 per cent by the end of September. The aggregate s179 funding ratio is now up at 135 per cent — by far and away the highest in the series history.
Higher interest rates mean you’ve got to save less now in order to have a pension later.
This is a point no-one seems to be mentioning about pension funds – higher rates should mean they move into surplus as their long term liabilities are matched by higher long term returns. So why is that never mentioned in the current furore over pensions and their ludicrous investment strategies? Could it be because thats a benefit of higher rates and doesn’t fit into the ‘Truss and Kwarteng are morons who are crashing the economy’ narrative that the usual suspects are pushing as hard as possible right now?
It seems more important to keep the housing market buoyant at any cost than to worry about pension values more than 6 months in the future. Higher interest rates threaten to make life difficult for “hard-pressed families” and property speculators. This is unacceptable in Britain today
Higher interest rates threaten to make life difficult for “hard-pressed families” and property speculators.
Probably in no small part because journalists consider themselves as part of that group.
@Jim
Because for a long time government financial policy has been to steal from savers to benefit borrowers. Not unconnected to all the parties to the decisions, politicians, business interests, the media mouthpieces, are all full of debt.
He’s a professor for one day a week at Sheffield, and a visiting (unpaid) professor at Anglia Ruskin, so shouldn’t be the 0.2P?
Jim’s right, most pension fund deficits are the result of zero interest rates; moving to a valuation rate of 3% or 5% would substantially reduce the present value of their liabilities. But, of course, if they can’t meet their margin calls because they bet the fund on the 3:30 at Chepstow, they’re still in trouble.
As usual with any problems in financial services, it all comes back to the one-eyed Scotsman. Brown found he could tax pension funds and nobody noticed, so he started to tax dividend receipts to encourage more gilt buying. But gilts didn’t deliver the necessary returns, so clever financial tricks like LDI were invented. With the results we now see.