Interest Rate Hikes Will Make Climate Change Worse

Link: https://jacobin.com/2022/10/interest-rates-climate-change-liz-truss-tories

Excerpt:

Raising interest rates won’t just push Britain into a recession and make the cost-of-living crisis worse for working-class people — it will discourage badly needed investments in green energy, undermining the UK’s efforts to address climate change.

….

The theory goes that higher interest rates help bring inflation down by making credit more expensive across the economy and reducing the amount of money firms and families have to spend on goods and services, thereby slowing price increases. But our inflation is predominantly driven by external factors, most notably high gas prices resulting from COVID-19 supply issues and the war in Ukraine. Instead, the bank’s policy is likely to push the UK economy into a recession, without addressing the main underlying causes of rising prices. That also means higher costs of borrowing for the very investments we need to reduce our reliance on costly fossil gas, like wind farms and home insulation.

To compound the problem, higher interest rates discourage investment in clean projects more than dirty ones. Running renewables doesn’t cost much: they rely on free wind and solar energy instead of expensive fossil fuels. But building them in the first place does come with high initial costs, meaning they are particularly impacted by the higher costs of credit. Similarly, insulation and heat pumps need to be paid for up front, before they begin to lower energy bills for households. Demand for improvements like heat pumps is significantly influenced by the availability of cheap loans to cover the initial installation costs.

Author(s): LUKASZ KREBEL

Publication Date: 23 Oct 2022

Publication Site: Jacobin

The triple lock will condemn Britain

Link: https://www.spectator.co.uk/article/the-pensions-triple-lock-will-condemn-britain

Graphic:

Excerpt:

The triple lock says that each year the state pension will increase by inflation, average earnings, or 2.5 per cent, whichever was highest in the year before. It is hugely popular with the Conservative party’s elderly base. It is also a fiscal and economic millstone around the British government’s neck.

The last two years have amply illustrated the basic problems with the design of the scheme. The first is that it was clearly not created with unusual economic circumstances in mind. In 2021, wages dropped in a short but deep recession. The next year, they went back up again. In economic terms, very little had changed. The rule used by the triple lock, however, treated this like a period of strong economic growth. If it had been left untouched, pensions would have increased by 8 per cent. And thanks to the ratcheting effect of the triple lock mechanism, they would have retained that boost against UK GDP into the long term.

In the end, the government ended up suspending the triple lock for a year, only to fall right into another unusual situation: stagflation, where economic activity stagnates but inflation skyrockets. Again, the triple lock recommends a large boost to pensions when government finances are already under strain, and again, this would lift up pensions as a share of GDP long term. And again, the government should suspend the rule to avoid this. But it seems Liz Truss has bottled it. 

You would have thought it tempting for the Conservative party to wave these away as two unusual years; in normal times – when GDP, inflation, and earnings increase together – then everything would be fine, right? Well, no. The way the triple lock is designed means that whenever you have a downturn, pensions will tend to rise as a share of GDP. And whenever you have a boom, they keep pace. The net effect is a constant ratchet where pensions,  in the words of the work and pensions select committee, take up an ‘ever-greater share of national income’.

This is not sustainable. Spending on the state pension is already set to rise significantly as a share of GDP over the coming decades; as the population gets older, there are more people claiming pensions and fewer working to pay for them. Add the triple lock into the mix, and you double the expected increase in demand. Scrapping the arbitrary 2.5 per cent element doesn’t do a lot to help, either; you still have significant growth through the ratcheting effects of the first two elements.

Author(s): Sam Ashworth-Hayes

Publication Date: 19 Oct 2022

Publication Site: The Spectator UK

Bank of England Bought Only Small Amounts of Bonds even Today, Warns Pension Funds They Have “Only Three Days Left” to Unwind Derivatives with BOE Support

Link: https://wolfstreet.com/2022/10/11/bank-of-england-bought-only-small-amounts-of-bonds-even-today-warns-pension-funds-they-have-only-three-days-left-to-unwind-derivatives-with-boe-support/

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Excerpt:

The relatively puny amounts of actual purchases show that the BOE is trying to calm the waters around the gilts market enough to give the pension funds some time to unwind in a more or less orderly manner whatever portion of the £1 trillion in “liability driven investment” (LDI) funds they cannot maintain.

The small scale of the intervention also shows that the BOE is not too upset with the gilts yields that rose sharply in the run-up to the crisis, triggering the pension crisis, and have roughly remained at those levels. The 10-year gilt yield today at 4.44% was roughly unchanged from yesterday and just below the September 27 spike peak.

And it makes sense to have these kinds of yields in the UK, and it would make sense for these yields to be much higher, given that inflation has spiked to 10%, and yields have not kept up with it, nor have they caught up with it. And to fight this raging inflation, the BOE will need to maneuver those yields far higher still:

So today, BOE Governor Andrew Bailey, speaking at the Institute of International Finance annual meeting in Washington D.C., warned these pension fund managers that the BOE will only provide this level of support, however little it may be, through the end of the week, to smoothen the gilt market and give the pension funds a chance to unwind in a more or less orderly manner the portions of their LDI funds that they cannot maintain.

Author(s): Wolf Richter

Publication Date: 11 Oct 2022

Publication Site: Wolf Street

Bank of England says pension funds were hours from disaster before it intervened

Link: https://www.cnbc.com/2022/10/06/bank-of-england-says-pension-funds-were-hours-from-disaster-before-it-intervened.html

Excerpt:

The Bank of England told lawmakers that a number of pension funds were hours from collapse when it decided to intervene in the U.K. long-dated bond market last week.

The central bank’s Financial Policy Committee stepped in after a massive sell-off of U.K. government bonds — known as “gilts” — following the new government’s fiscal policy announcements on Sept. 23.

The emergency measures included a two-week purchase program for long-dated bonds and the delay of the bank’s planned gilt sales, part of its unwinding of Covid pandemic-era stimulus.

The plunge in bond values caused panic in particular for Britain’s £1.5 trillion ($1.69 trillion) in so-called liability-driven investment funds (LDIs). Long-dated gilts account for around two-thirds of LDI holdings.

…..

The 30-year gilt yield fell more than 100 basis points after the bank announced its emergency package on Wednesday Sept. 28, offering markets a much-needed reprieve.

Cunliffe noted that the scale of the moves in gilt yields during this period was “unprecedented,” with two daily increases of more than 35 basis points in 30-year yields.

“Measured over a four day period, the increase in 30 year gilt yields was more than twice as large as the largest move since 2000, which occurred during the ‘dash for cash’ in 2020,” he said.

Author(s): Elliot Smith

Publication Date: 6 Oct 2022

Publication Site: CNBC

U.K.’s LDI-related turmoil puts spotlight on use of derivatives

Link: https://www.pionline.com/pension-funds/uks-ldi-related-turmoil-could-spread-experts-say

Graphic:

Excerpt:

The Bank of England’s emergency bond-buying last week helped shore up U.K. pension funds and threw a spotlight on a popular strategy among corporate plans known as LDI – or liability-driven investing.

Total assets in LDI strategies in the U.K. rose to almost £1.6 trillion ($1.8 trillion) at the end of 2021, quadrupling from £400 billion in 2011, according to the Investment Association, a trade group that represents U.K. managers. Many LDI mandates allow for the use of derivatives to hedge inflation and interest rate risk.

….

Here’s how LDI works: Liability-driven investing is employed by many pension funds to mitigate the risk of unfunded liabilities by matching their asset allocation and investment policy with current and expected future liabilities. The LDI portion of a pension fund’s portfolio utilizes liability-hedging strategies to reduce interest-rate risk, which could include long government and credit bonds and derivatives exposure.

Jeff Passmore, LDI solutions strategist at MetLife Investment Management, said the situation with U.K. pension plans “has been challenging, and the heavy use of derivatives in the U.K. LDI model has made the current situation worse than it would otherwise be.”

While most U.S. LDI portfolios rely on bonds rather than derivatives, ‘”those U.S. plan sponsors who have leaned heavily on derivatives and leverage should take a cautionary lesson from what we’re seeing currently across the Atlantic.”

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The U.K. pension debacle “is a plain-and-simple problem of leverage,” Charles Van Vleet, assistant treasurer and chief investment officer at Textron, said in an email.

Many U.K. pension plans were interest rate-hedged at 70%, while also holding 60% in growth assets, suggesting 30% leverage, he said. The portfolio’s growth assets have lost around 20% of value if held in public equities and fixed income or about 5% down if held in private equity, he noted.

“Therefore, to make margin calls on their derivative rate exposure they had to sell growth assets – in some cases, selling physical-gilts to meet derivative-gilt margin calls,” Mr. Van Vleet said.

“The problem is worse for plans who gain rate exposure with leveraged ETFs. The leverage in those funds is commonly via cleared interest rate swaps. Margin calls for cleared swaps can only be met with cash – not posted collateral. Therefore, again selling physical-gilts to meet derivative-gilt margin calls.”

Author(s):

BRIAN CROCE
COURTNEY DEGEN
PALASH GHOSH
ROB KOZLOWSKI

Publication Date: 5 Oct 2022

Publication Site: Pensions & Investments

UK Pensions Got Margin Calls

Link: https://www.bloomberg.com/opinion/articles/2022-09-29/uk-pensions-got-margin-calls

Excerpt:

I said above that pension funds are unusually insensitive to short-term market moves: Nobody in the pension can ask for their money back for 30 years, so if the pension fund has a bad year it won’t face withdrawals and have to dump assets. Still, pension managers are sensitive to accounting. If your job is to manage a pension, you want to go to your bosses at the end of the year and say “this pension is now 5% less underfunded than it was last year.” And if you have to instead say “this pension is now 5% more underfunded than it was last year,” you are sad and maybe fired; if the pension gets too underfunded your regulator will step in. You want to avoid that.

And so the way you will approach your job is something like:

  1. You will try to beat your benchmark, buying stocks and higher-yielding bonds to try to grow the value of your assets.
  2. You will hedge the risk of rates going down. If rates go down, your liabilities will rise (faster than your assets); you are short gilts. You want to do something to minimize this risk.

The way to do that hedging is basically to get really long gilts in a leveraged way. If you have £29 of assets, you might invest them like this:

  1. £24 in gilts,
  2. £5 in stocks, and
  3. borrow another £24 and put that in gilts too.[5] [5] No science to this number, and you’d probably do a bit less if your stocks are correlated with rates.

That way, if rates go down, the value of your portfolio goes up to match the increasing value of your liabilities. So you are hedged. You were short gilts, as an accounting matter, and you’ve solved that by borrowing money to buy more gilts. In practice, the way you have borrowed this money is probably not by actually getting a loan and buying gilts but by doing some sort of derivative (interest-rate swap, etc.) with a bank, where the bank pays you if rates go down and you pay the bank if rates go up. And you have posted some collateral with the bank, and as interest rates move up or down you post more or less collateral. 

This all makes total sense, in its way. But notice that you now have borrowed short-term money to buy volatile financial assets. The thing that was so good about pension funds — their structural long-termism, the fact that you can’t have a run on a pension fund: You’ve ruined that! Now, if interest rates go up (gilts go down), your bank will call you up and say “you used our money to buy assets, and the assets went down, so you need to give us some money back.” And then you have to sell a bunch of your assets — the gilts and stocks that you own — to pay off those margin calls. Through the magic of derivatives you have transformed your safe boring long-term pension fund into a risky leveraged vehicle that could get blown up by market moves.

I know this is bad but I find something aesthetically beautiful about it. If you have a pot of money that is immune to bank runs, over time, modern finance will find a way to make it vulnerable to bank runs. That is an emergent property of modern finance. No one sits down and says “let’s make pension funds vulnerable to bank runs!” Finance, as an abstract entity, just sort of does that on its own.

Anyway, as I said above, 30-year UK gilt rates were about 2.5% this summer. They got to nearly 5% this week, and were at about 3.9% at 9 a.m. New York time today. You can fill in the rest.

Author(s): Matt Levine

Publication Date: 29 Sept 2022

Publication Site: Bloomberg

Pension funds crisis forces £65bn bailout by Bank

Link: https://www.telegraph.co.uk/business/2022/09/28/pension-funds-crisis-forces-65bn-bailout-bank/

Graphic:

Excerpt:

Britain’s pension funds were on Wednesday at the centre of the financial crisis sparked by the mini-budget forcing the Bank of England to launch a £65 billion emergency bailout

The Bank warned of a “material risk to UK financial stability” and stepped in to buy long-term gilts, as plunging markets for UK debt sent borrowing costs spiralling and forced pension funds to dump their assets. Economists compared the crisis to the run of withdrawals that led to the collapse of Northern Rock in the financial crisis. 

However, the move by Governor Andrew Bailey helped restore some calm to markets, and pensions experts said retirement pots were not under threat. Nevertheless, worries that Mr Kwarteng’s radical mini-Budget will trigger further shocks for investors in gilts wiped billions of pounds off the stock market value of Britain’s biggest pension funds.

….

The Bank hopes to halt a domino effect in the City by temporarily suspending plans to offload £80bn of gilts held on its balance sheet. Instead for 13 days it will revert to buying them at a rate of £5bn per day using newly created money in a process known as quantitative easing.

The measures sparked a sharp rally in the market for the 30-year gilts that pension funds had been forced to sell. The cost of such borrowing fell by more than 1 percentage point, a significant downward move. Meanwhile the pound fell initially after the Bank’s announcement on fears of further inflation but recovered to finish roughly flat at nearly $1.09 against the dollar.

Author(s):

Tim Wallace
and
Ben Riley-Smith

Publication Date: 28 Sept 2022

Publication Site: UK Telegraph

Polio Is Back in the US and UK. Here’s How That Happened

Link: https://www.wired.com/story/polio-is-back-in-the-us-and-uk-heres-how-that-happened/

Excerpt:

Start with the vaccine formula—or formulas, actually, because there are two. They were born from a ferocious mid-20th century rivalry between scientists Jonas Salk and Albert Sabin. Salk’s formula, the first to be approved, is injected; it uses an inactivated version of the virus, and protects against developing disease, but does not stop viral transmission. Sabin’s formula, which came a few years later, used an artificially-weakened live virus. It does block transmission, and—because it is a liquid that gets squirted into a child’s mouth—it is cheaper to make and easier to distribute, since it doesn’t require trained healthcare workers or careful disposal of needles. Those qualities made the Sabin oral version, known as OPV, the bulwark of polio control, and eventually the main weapon in the global eradication campaign.

The oral vaccine had a unique benefit. Wild-type polio is actually a gut virus: It locks onto receptors in the intestinal lining and replicates there before migrating to the nerve cells that control muscles. But because it’s in the gut, it also passes out of the body in feces and then spreads to other people in contaminated water. The Sabin vaccine takes advantage of that process: The vaccine virus replicates in a child, gets pooped out, and spreads its protection to unvaccinated neighbors.

Yet that benefit concealed a tragic flaw. Once out of every several million doses, the weakened virus reverted to the neurovirulence of the wild type, destroying those motor neurons and causing polio paralysis. That mutation would also make a child who harbored the reverted virus a potential source of infection, rather than protection. That risk is what caused rich nations to abandon the oral version: In 1996, when wild polio was no longer occurring in the US, the oral vaccine caused about 10 cases of polio paralysis in children. The US switched to the injectable formula, known as IPV, in 2000, and the UK followed in 2004.

Polio vaccination requires several doses to create full protection, and once that occurs, children are protected against both wild-type and vaccine-derived versions of the virus. So the international vaccination campaign continued to rely on OPV, arguing that the risk would diminish as more children received protection. That was a reasonable gamble when the effort was new and health authorities thought it would take 10 to 12 years to achieve eradication. But thanks to funding shortfalls, political and religious unrest, and the Covid pandemic—which imposed a slowdown not just on eradication activities but on all childhood vaccines—it’s now been 34 years, and the job is not done. Meanwhile, last year in 20 countries there were a total of 688 cases of paralysis of what’s called “circulating vaccine-derived poliovirus,” and only six cases of wild-type polio, in three nations.

Author(s): MARYN MCKENNA

Publication Date: 24 Aug 2022

Publication Site: Wired

Excess mortality in England

Link: https://app.powerbi.com/view?r=eyJrIjoiYmUwNmFhMjYtNGZhYS00NDk2LWFlMTAtOTg0OGNhNmFiNGM0IiwidCI6ImVlNGUxNDk5LTRhMzUtNGIyZS1hZDQ3LTVmM2NmOWRlODY2NiIsImMiOjh9

Data download:

Graphic:

Excerpt:

The numbers of expected deaths are estimated using statistical models and based on previous 5 years’ (2015 to 2019) mortality rates. Weekly monitoring of excess mortality from all causes throughout the COVID-19 pandemic provides an objective and comparable measure of the scale of the pandemic [reference 1]. Measuring excess mortality from all causes, instead of focusing solely on mortality from COVID-19, overcomes the issues of variation in testing and differential coding of cause of death between individuals and over time [reference 1].


In the weekly reports, estimates of excess deaths are presented by week of registration at national and subnational level, for subgroups of the population (age groups, sex, deprivation groups, ethnic groups) and by cause of death and place of death.

Author(s): Office for Health Improvement and Disparities

Publication Date: accessed 10 Aug 2022

Publication Site: Public PowerBI dashboard

CMI mortality monitor – week 28 of 2022

Link: https://www.actuaries.org.uk/system/files/field/document/Mortality%20summary%20pandemic%20monitor%20Week%2028%202022%20v01%202022-07-26.pdf

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Excerpt:

Data sources
The provisional weekly deaths are available from:
• ONS (England & Wales)
https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/deaths/datasets/wee
klyprovisionalfiguresondeathsregisteredinenglandandwales
• NRS (Scotland)
https://www.nrscotland.gov.uk/covid19stats
• NISRA (Northern Ireland)
https://www.nisra.gov.uk/statistics/death-statistics/weekly-death-registrations-northern-ireland

Author(s): Continuous Mortality Investigation

Publication Date: July 2022

Publication Site: Actuaries UK

Pensions watchdog warns about climate risk in rebuke of HSBC banker who downplayed danger

Link: https://www.reuters.com/world/uk/uk-pensions-regulator-says-pension-schemes-should-not-ignore-climate-change-2022-05-23/

Excerpt:

UK pension schemes should not ignore climate change, a senior executive at The Pensions Regulator said on Monday, the first watchdog to weigh in after a top HSBC banker was suspended after playing down the financial risks of climate change.

Regulators across the world have been putting pressure on the financial services industry to take climate change into account when calculating risks to their business models.

Stuart Kirk, a senior HSBC banker in charge of sustainable investments, had said at an industry event last week that central bank policymakers and other global authorities were exaggerating the financial risks of climate change. read more

The bank has since suspended him pending an internal investigation, sources familiar with the matter told Reuters on Monday.

Publication Date: 23 May 2022

Publication Site: Reuters

The state pension – a creaking centenarian

Link: https://cpd180322.pensions-expert.com/

Graphic:

Excerpt:

Separate SPAs for men and women were introduced in 1940 — age 65 for men and 60 for women, with a decision to equalise the SPA for men and women trailed in the 1993 white paper ‘Equality in state pension age’. Now that the same age applies for both men and women, at 66, there is still huge controversy over the notice period and quality of information given to women over the age of 50 on the exact timetables for this change. 

Demography has increasingly put the whole system under strain. Andrew Tully, technical director at Canada Life, warns: “By 2045, the number of people of pensionable age will grow to 15.2mn, an increase of 28 per cent on the level in 2020. The ‘oldest old’ cohort is also increasing, with the number of people aged 85 and over projected to almost double to 3.1mn by 2045. 

“At the same time, the working age population will increase by much less — around 4.5 per cent up by the mid-2030s, but then remaining around that level by 2045. Meanwhile, we are seeing a decrease in the number of children, with those aged 0 to 15 projected to fall by nearly 9 per cent by mid-2030.”

Author(s): Stephanie Hawthorne

Publication Date: 18 March 2022

Publication Site: Pensions Expert