This week sees Pensions Expert editor Nick Reeve get deep into the weeds of the effects of monetary policy, via an excellent new play about the Royal Bank of Scotland.
A few weeks ago, I visited the Dundee Rep Theatre to see the new play Make It Happen, starring the fabulous Brian Cox as the ghost of economist Adam Smith and Sandy Grierson as the notorious former RBS chief executive Fred Goodwin.
It’s a fascinating satire of the events surrounding the growth of RBS and its eventual near collapse and bailout from the government.
It comes to the Edinburgh International Festival next week, and if you can get hold of a ticket I would highly recommend it – even if just for the sight of Brian Cox’s Adam Smith prancing around the stage and praising the modern phenomenon of John Lewis stores.
I’ve spent a lot of time since seeing Make It Happen thinking about the events of 2007 to 2009 – a period when I was only just starting my career in financial services.
It was in direct response to the crisis that engulfed RBS and the rest of the banking system that the Bank of England stepped in to buy gilts in massive volumes, a desperate effort to pump liquidity into the financial system through quantitative easing (QE).
Almost as soon as the policy was introduced, experts have been warning that it would come back to bite us all.
This week, Pension Insurance Corporation (PIC) published a report on QE and the subsequent switch to quantitative tightening (QT) – actively selling gilts back to the market, as well as allowing shorter-dated bonds to mature.
PIC argues that the Bank is being too aggressive in actively selling gilts, rather than the passive approach taken by other central banks, which have simply allowed their purchased bonds to mature.
Aside from increasing borrowing costs, PIC argues that QT has also affected pensions policy due to the interaction between gilt yields and defined benefit pension liabilities.
With triennial valuations ongoing for many schemes, it is perhaps time for trustees to grill their actuaries about exactly what bond yields are doing to liabilities. Schemes have been burned recently by sudden moves in gilt markets, and while for many the 2022 ‘mini-budget’ fallout was positive for funding positions, this won’t necessarily last.
While I can claim to be the son of an actuary, a true understanding of DB valuations is not hereditary, so I can’t confidently get into the weeds of this issue. I would be interested, therefore, to hear your views about PIC’s report.
Is the Bank of England being too aggressive? Are surpluses not as big as we think they are? And could running on your pension scheme to generate a surplus introduce unnecessary risks because of QT?
With those very simple questions, I’ll leave you to have a good weekend.
Nick Reeve is editor of Pensions Expert.
This editorial initially appeared in Pensions Expert’s Friday Takeaway email, summarising the biggest news of the week and the latest appointments. To sign up, please register for free.
