I’m going to
go a little UK-centric in this article, so if you’ve ever worked in the UK,
this could be very important; if not, I hope you find it informative.
It’s time for
the UK’s 2012 budget this week (Wednesday 21st March), where the Chancellor
of the Exchequer, George Osborne, will lay out the Government’s plans for the
UK economy and public finances for the year ahead. Whilst that possibly may not
be the most exciting sentence you’ve read this week, what the budget contains
could have a big impact on the personal finances of anyone who has a pension in
How so? Well,
one thing that the Chancellor is expected to announce is that he is considering
issuing Government bonds (commonly known as “gilts”) with a term of 100 years. (This
may still sound incredibly uninteresting, but stick with me…).
maximum duration for Government issued bonds is about 30 years – so this is
quite a leap. The main reason this is being considered is because it is
incredibly cheap for the Government to borrow money at the moment – depending on
how you calculate it, you could argue that it’s free.
Because of the
global financial crisis, many investors have run for cover, and are desperately
seeking “safe” places to store their wealth – and rightly or wrongly, many have
decided that lending money to AAA rated governments is the best thing to do.
As a result,
the “yields” (return/interest) on these bonds have fallen to incredibly low
levels – which is simply a result of supply and demand. As demand goes up, so
does the price – and because the returns are fixed in monetary terms, any
increase in purchase price has the effect of reducing the amount of return in
As I write
this (Tuesday evening, Jakarta time), the current yields for UK government
bonds are all less than 0.5% for terms of 2 years or less; less than 1% for 4
years or less; less than 2% for 8 years or less, and only 3.47% for the 30-year
Now it doesn’t
take a genius to work out that when inflation is running at 3.4% (based on the latest
figures which were published earlier today), if you’re only making a 2% return,
you’re losing money. Similarly, if you can borrow money at less than the rate
of inflation, then you’re in profit (as long as you do something useful with
average rate that the government has had to pay (calculated using 10-year
bonds) over the last 25 years is 6.28% - the highest during that time being 12.84%
(22 years ago) and the lowest being 1.97% (two months ago). So it should come
as no surprise that the Government sees an opportunity to drastically reduce
average borrowing rates for a very long time.
But if it is
an opportunity for the Government to save money, then surely it’s a bad idea
for investors to buy the bonds? Why would you invest in something which gives a
fixed return, at probably the worst time to do it?
In short: You
wouldn’t. That would be slightly crazy. If you buy a 100-year bond, paying a
return of less than the average rate of inflation, you are almost certainly
going to lose money, almost every year, for 100 years.
The last time
the UK issued 100-year bonds was nearly 100 years ago, to help pay for World
War One. It has been calculated that anyone who bought those bonds at that time
(and held them until now) would have by now lost 98% of their investment, in
So how can
this possibly be a threat to anyone with a pension in the UK? Surely no pension
company would be crazy enough to buy them? That’s what you would think.
But there’s an
important thing to remember here – governments are powerful. And governments,
through regulation, can put enough pressure on professional money managers to
make them do things which may not be a sensible thing to do in purely financial
terms – but which benefit the government.
If that sounds
too much like a conspiracy theory, consider the vast amount of government bonds
which have been bought in the last few months by European Banks (enough to prop
up several European governments).
In the UK
itself, only 8 years ago, Standard Life (a major life insurance company) was
forced to sell half of its portfolio of shares and buy UK Government bonds with
it - £7.5billion worth – all in the name of “solvency rules”.
And it would
be relatively easy to do – simply tell the regulatory authorities to view the
new 100-year bonds as “ultra-safe”, and on a risk-weighted basis this would
allow the pension firms a little more freedom to hold riskier assets – as long
as they held some of the wealth-destroying 100-year bonds.
So, if you
have a pension in the UK, frozen or otherwise, now is definitely the time to
get it out (if you haven’t done it already). If you don’t, there’s a very high
chance that you’ll be indirectly buying one of the worst investments of the
century (although not as bad as the one highlighted in last weeks’ blog) via
In case you
weren’t aware, you can get it out – quickly and cheaply – whether it’s a private
pension, a company pension, a final salary scheme, or whatever. And as a bonus,
it won’t have tax deducted from it when it pays out either.
strongly suggest that if you have a pension in the UK, even if it’s from years
ago, get in touch – I’ll help you find out how it’s doing, explain what your
options are, and show you how you can make the most money from it.