There was much consternation in the pension world recently when the Bank’s chief economist, Andy Haldane, stated in an interview that he “could not make the remotest sense” of pensions. However, before we all start to lose sleep over the fate of the BoE employees and their future retirement plans, it has become clear that there is someone in Threadneedle Street who appears to know exactly how pensions work.
The good news is that the deficit of the Bank of England’s pension scheme has dropped to zero, making it one of the few funded pension schemes in the country that can actually meet its liabilities. So clearly the BoE knows how to cope in a low interest environment without endangering the lifestyles of their former employees.
Now the bad news. They did it by increasing their annual contribution to the fund in 2015 to 54.6 % of member’s pensionable salary, up from the previous level of 51.8% in 2014. This is a staggering leap forward from the standard 24 % they were contributing in 2011.
The amazing thing here is that here we have the very people who are responsible for the low interest rates that pension funds are receiving, and who are to blame for the staggering surge in pension scheme deficits across the UK, able to ensure their own future by putting in levels of contribution that would sink any ordinary commercial firm. Of course, it’s easy to find the money to top up your pension fund when you are the people who actually create money in the first place.
However, no one in the BoE’s management team can claim to be ignorant of the effect of quantitative easing if they have had to make the decision to increase their support for their own scheme so dramatically. In their report, the trustees of the scheme did concede that the Bank’s own bond-buying scheme had hit the value of their own scheme. Nevertheless, they ignored the massive increase in contributions and put the improvement to a position of 100% funded down to “increases to benefits applied being lower than the long-term RPI and CPI assumptions and a higher number of deaths than forecast.”
This implies that the elimination of the deficit was nothing to do with the massive increase in contributions over the last few years and instead was down to the BoE’s inability to forecast inflation and their poor grasp of the longevity statistics.
Funny how this worked out well for them whilst the rest of the UK’s schemes are being driven into the arms of the pension protection fund. Mr Haldane and his friends doth protest too much, methinks. They may not be able to make the remotest sense of pensions in general, but they seem to have a firm grasp of how to manage their own.