Issue of the week: the tussle over gilts

Demand for Government bonds has seen yields plummet, but that’s not the only cause of Britain’s pensions crisis

When the Bank of England launched a £70bn bond-buying plan earlier this month, as part of its “sledgehammer” post-brexit stimulus programme, some questioned its likely efficacy, but few expected it to hit problems immediately. Yet within a week, there was a snag, said the Financial Times. Despite the Bank’s willingness to pay “over the odds” for long-dated Government bonds (gilts), not enough “willing sellers showed up”, leaving the Bank with a £52m shortfall. Another flop this week would have turned the faces of Bank officials “as red as the waistcoats of their doormen”, and possibly even forced “the Old Lady” to restructure its quantitative easing programme. Fortunately, the second effort proved successful: sellers couldn’t resist “the sharply higher prices” that followed the “botched first attempt”.

The reason for this unusual “sellers’ strike”, said Marion Dakers in The Daily Telegraph, was that gilts – especially those with long maturities – are much prized by pension funds and insurers, who believe they offer a safe and reliable source of income for paying out future benefits to retirees. And given the “massive liabilities” faced by many of Britain’s company pension schemes, they are “in no mood to part with them”. Yet this reluctance has compounded the problem. Demand for gilts is so high that prices have soared – causing yields, which move inversely to prices, to plummet. Rates on long-dated 30-year gilts fell to an all-time low of 1.26% last week. The steep fall prompted former pensions minister Ros Altmann to call for a national inquiry into the impact of the Bank’s bondbuying plan on company pensions.

“Many people in the pensions and savings industry would like to see QE fail, because of the downward pressure it places on bond yields,” said Alex Brummer in the Daily Mail. “The Bank needs to show more sensitivity to this lobby”, but it can’t give up on monetary stimulus when “there is nothing else” it can do. What’s more, it simply isn’t true that many of Britain’s biggest firms can no longer afford “to honour their pension promises”, said Patrick Hosking in The Times. Blue-chip companies “paid five times as much in dividends to shareholders last year as they did to their defined-benefit pension plans”. Nearly a third of FTSE 100 firms could have wiped out their pension deficits in 2015 with the cash they paid to shareholders. The Pensions Regulator and company pension trustees don’t have the power to stop special dividends and buybacks. But they could “publicly register concern” when cash is unnecessarily removed from a company. “Moral suasion can work.” No one wants to risk “being likened to Sir Philip Green”.