Sorta, and around and about.
The reason? One of the biggest buyers of government debt is about to become a seller – pushing up state borrowing costs as a result.
Defined benefit pension schemes, often known as final salary pensions, have traditionally been big buyers of the Government’s long-term debt.
The Treasury could keep borrowing cheaply as these pension funds were effectively guaranteed lenders through the gilt market.
But most of those schemes have closed to new contributions. Employers have shifted from costly defined benefit schemes to defined contribution pensions, which link payouts to the amount workers save rather than their final salaries.
Now, the sun is setting on the defined benefit industry as members reach retirement age.
As a result, instead of buying bonds, these funds are going to ditch around £40bn of long-dated gilts over the next five years as they raise funds to pay out to pensioners.
Brown, G, changed the rules on defined benefit pensions plans. Removed the dividend tax free stuff, forced higher bond holdings on solvency grounds on the funds. This made them big buyers of bonds which was nice for Brown. G.
But the prices on offer changed so much that the defined benefits pensions closed. And here we are, there are no new defined benefit pensions on offer (even in the public sector, they’re mostly unfunded) and so the bond positions are being sold down.
Which is, sorta, if you squint, a Laffer Effect. My Clever Plan! to lower the cost of govt borrowing has, in the fullness of time and maturation of prices, raised the costs of govt borrowing.
Thanks, Gordo.