Battle lines drawn over the future of UK’s biggest pension fund

Link:https://www.theguardian.com/business/2022/feb/05/battle-lines-drawn-over-the-future-of-uks-biggest-pension-fund

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The UK’s biggest private pension scheme, the Universities Superannuation Scheme (USS), was no different: the custodian of the retirement savings of 470,000 university and college workers lost billions of pounds.

At its latest valuation, actuaries came up with an alarming conclusion: the assets of USS were only worth £67bn, leaving a huge deficit of £18bn compared to the liabilities it has promised to pay out in the future.

Yet the recovery was almost as extraordinary as the decline. Central banks pumped money into the economy, and tech companies in the US recorded astonishing gains. That helped USS assets back to more than £90bn at the end of January.

That recovery – and the controversial question of how the fund accounts for it – has put USS at the centre of a row that could result in university staff occupying picket lines across the country. The scheme will also be at the centre of a legal battle this month, with academics asking a court for permission to sue directors for not performing their duties.

….

 In a paper published in September, David Miles, professor of economics at Imperial College London and a former Bank of England monetary policymaker, and James Sefton, also an Imperial economics professor, argued that the risk of USS having insufficient funds to pay promised pensions was between 20% and 40%.

Simon Pilcher, chief executive of USS Investment Management, is in charge of choosing the actual investments. “Sadly, one can’t project the past into the future,” he said.

“Today, we think it is reasonable to expect lower returns going forward than we’ve experienced in the past, because it’s those higher returns that have driven us to these high prices.”

Author(s): Jasper Jolly

Publication Date: 5 Feb 2022

Publication Site: The Guardian

Visualizing the 700-Year Fall of Interest Rates

Link: https://www.visualcapitalist.com/700-year-decline-of-interest-rates/

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Today’s graphic from Paul Schmelzing, visiting scholar at the Bank of England (BOE), shows how global real interest rates have experienced an average annual decline of -0.0196% (-1.96 basis points) throughout the past eight centuries.

The Evidence on Falling Rates

Collecting data from across 78% of total advanced economy GDP over the time frame, Schmelzing shows that real rates* have witnessed a negative historical slope spanning back to the 1300s.

Displayed across the graph is a series of personal nominal loans made to sovereign establishments, along with their nominal loan rates. Some from the 14th century, for example, had nominal rates of 35%. By contrast, key nominal loan rates had fallen to 6% by the mid 1800s.

Author(s): Dorothy Neufeld

Publication Date: 4 Feb 2020

Publication Site: Visual Capitalist

Standard Chartered fined £46.5m by Bank of England over reporting failures

Link: https://www.theguardian.com/business/2021/dec/20/standard-chartered-fined-bank-of-england-pra

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The Bank of England has fined Standard Chartered £46.5m for repeatedly misreporting its liquidity position and for “failing to be open and cooperative” with the regulator.

The Bank’s Prudential Regulation Authority (PRA) said Standard Chartered had made five errors in reporting an important liquidity metric between March 2018 and May 2019, which meant the watchdog did not have a reliable overview of the bank’s US dollar liquidity position.

…..

One of the errors occurred in November 2018, as a result of a mistake in a spreadsheet entry. A positive amount was included when a zero or negative value was expected, leading to an $7.9bn (£6bn) over-reporting of the bank’s dollar liquidity position.

Author(s): Joanna Partridge

Publication Date: 20 Dec 2021

Publication Site: The Guardian

Omicron Is an Economic Threat, but Inflation Is Worse, Central Bankers Say

Link:https://www.nytimes.com/2021/12/16/business/economy/omicron-inflation.html

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Facing surging inflation, three of the world’s most influential central banks — the Federal Reserve, Bank of England and European Central Bank — took decisive steps within 24 hours of each other to look past Omicron’s economic uncertainty.

On Thursday, Britain’s central bank unexpectedly raised interest rates for the first time in more than three years as a way to curb inflation that has reached a 10-year high. The eurozone’s central bank confirmed it would stop purchases under a bond-buying program in March. The day before, the Fed projected three interest rate increases next year and said it would accelerate the wind down of its own bond-buying program.

….

Aside from Omicron, the central banks were running out of reasons to continue emergency levels of monetary stimulus designed to keep money flowing through financial markets and to keep lending to businesses and households robust throughout the pandemic. The drastic measures of the past two years had done the job — and then some: Inflation is at a nearly 40-year high in the United States; in the eurozone it is the highest since records began in 1997; and price rises in Britain have consistently exceeded expectations.

….

The Federal Reserve and Bank of England are worried about the persistence of high inflation. For the European Central Bank, inflation in the medium term is too low, not too high. It is still forecasting inflation to be below its 2 percent target in 2023 and 2024. To help reach that target in coming years, the central bank will increase the size of an older bond-buying program beginning in April, after purchases end in the larger, pandemic-era program. This is to avoid “a brutal transition,” Ms. Lagarde said.

Author(s): Eshe Nelson

Publication Date: 16 Dec 2021

Publication Site: New York Times

Visualizing the 700-Year Fall of Interest Rates

Link:https://www.visualcapitalist.com/700-year-decline-of-interest-rates/

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Excerpt:

Today’s graphic from Paul Schmelzing, visiting scholar at the Bank of England (BOE), shows how global real interest rates have experienced an average annual decline of -0.0196% (-1.96 basis points) throughout the past eight centuries.

….

Starting in 1311, data from the report shows how average real rates moved from 5.1% in the 1300s down to an average of 2% in the 1900s.

The average real rate between 2000-2018 stands at 1.3%.

….

Demographics impact interest rates on a number of levels. The aging population—paired with declining fertility levels—result in higher savings rates, longer life expectancies, and lower labor force participation rates.

In the U.S., baby boomers are retiring at a pace of 10,000 people per day, and other advanced economies are also seeing comparable growth in retirees. Theory suggests that this creates downward pressure on real interest rates, as the number of people in the workforce declines.

Author(s): Dorothy Neufeld

Publication Date: 4 Feb 2020

Publication Site: Visual Capitalist

The Sustainability of State and Local Government Pensions: A Public Finance Approach

Link: https://www.brookings.edu/wp-content/uploads/2021/03/BPEASP21_Lenney-et-al_conf-draft_updated_3.24.21.pdf

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In this paper we explore the fiscal sustainability of U.S. state and local government pensions plans.
Specifically, we examine if under current benefit and funding policies state and local pension plans
will ever become insolvent, and, if so, when. We then examine the fiscal cost of stabilizing pension
debt as a share of the economy and examine the cost associated with delaying such stabilization
into the future. We find that, despite the projected increase in the ratio of beneficiaries to workers
as a result of population aging, state and local government pension benefit payments as a share of
the economy are currently near their peak and will eventually decline significantly. This previously
undocumented pattern reflects the significant reforms enacted by many plans which lower benefits
for new hires and cost-of-living adjustments often set beneath the expected pace of inflation.
Under low or moderate asset return assumptions, we find that few plans are likely to exhaust their
assets over the next few decades. Nonetheless, under these asset returns plans are currently not
sustainable as pension debt is set to rise indefinitely; plans will therefore need to take action to
reach sustainability. But the required fiscal adjustments are generally moderate in size and in all
cases are substantially lower than the adjustments required under the typical full prefunding
benchmark. We also find generally modest returns, if any, to starting this stabilization process
now versus a decade in the future. Of course, there is significant heterogeneity with some plans
requiring very large increases to stabilize their pension debt.

Author(s): Jamie Lenney, Bank of England
Byron Lutz, Federal Reserve Board of Governors
Finn Schüle, Brown University
Louise Sheiner, Brookings Institution

Publication Date: 25 March 2021

Publication Site: Brookings

Negative Interest Rates Are Coming, but There Is No Chance That They Will Work

Link: https://www.nakedcapitalism.com/2021/02/negative-interest-rates-are-coming-but-there-is-no-chance-that-they-will-work.html

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As The Guardian and many other newspapers reported yesterday, the Bank of England yesterday announced that it was preparing the ground for negative official interest rates within six months.

As the Bank has suggested, this does not mean that there will be negative rates. But unless they allow for the possibility if that now they will, as they admit, restrict their policy options. In that case this announcement has to be seen as creating the possibility of negative nominal interest rates.

….

Sixth, it is an unfortunate fact that this will not work. As I have already noted, in practice we already have real negative interest rates. There is nothing new then about this policy. And since existing negative rates have not stopped people saving, making such rates official will have little macro impact. After a crisis people are cautious. They are willing to pay the price of a government guarantee. And if that is a negative interest rate, so be it. I suggest that will continue to be true for several years based on past trends.

My suggestion is, then, that the Bank can try this policy but it will be a vain attempt to stimulate the economy that will not succeed. Much more radical thinking is required to achieve that. I will address that in another post, soon. I will link it when it is up.

Author(s): Yves Smith, Richard Murphy

Publication Date: 6 February 2021

Publication Site: naked capitalism