Have you been following the latest movements of the yield on very long maturity government bonds – known as “gilts”?
Probably not, but a hiatus over rates plunged pension funds of Britain’s top 350 companies £20 billion further into deficit during January. Since June 2005 the shift is £35 billion!
This madness underlines how workers are being asked to pay the price for financial surges over which they have no control.
A fake crisis will mean more demands for cuts in pensions and for workers to pay more from their wages.
The gilts yield fell recently to levels not seen for almost half a century. The fall reflected strong buying from pension funds and others.
Yields fall when prices rise because bonds pay a fixed sum of interest every year, and that fixed interest payment represents a smaller percentage of the higher purchase price.
Pension deficits are calculated using long-maturity gilt yields. The more yields fall, the bigger the pension deficits.
In a practical sense, lower gilt yields mean that funds have to spend more to buy enough bonds to provide cash flows sufficient to pay their pensioners.
So the act of trying to reduce pension fund risks actually increases pensions deficits.
Even Tim Bond, the head of global asset allocation at Barclays Capital, described the fall in government bond yields as a sign that the economy was “in the grip of an entirely self-manufactured pension fund crisis.
“To state that the gilt bubble is practising larceny on a grand scale is not polemical hyperbole, it is a simple statement of fact.”
He added that money used to buy gilts at minimal yields was not used for anything socially productive and that “it would do more good for society had the money been left stacked at street corners free to all comers”.