The Bank of England’s gilty secret: betting on inflation?

Discussion in 'Wall St. News' started by ASusilovic, Mar 31, 2009.

  1. The Bank of England has a rather smart set of pension fund managers. Take the below snippets, from the BoE employees pension fund report, 2008.

    Major changes during the Scheme year
    2007-08 was a year of major structural change for the Fund:


    - at the request of the Bank, and after careful consideration, the Trustee made a fundamental change in investment strategy, as a result of which the Fund’s assets are now predominantly invested in gilt-edged securities;

    In fact, that conservative gilt reorientation saw the fund up considerably this year, in a period in which other pension funds have been decimated.

    Except, go further into the report and a curiosity arises (emphasis ours):

    The revised strategy is reflected in a new Statement of Investment Principles adopted during the year, a copy of which is available on request. In accordance with the new Statement of Principles the Fund’s former holdings of quoted equities and overseas equities were liquidated during the year and the proceeds reinvested in gilts of appropriate maturities, mostly index-linked in line with the liabilities. Other less liquid investments are also being progressively sold and the proceeds similarly reinvested.

    Indeed, whereas in 2007, index-linked gilts comprised 25 per cent of the BoE pension fund portfolio, in 2008, they made up just over 70 per cent of it.

    Index-linked gilts, of course, being securities designed to withstand inflationary conditions. A pension pot position not exactly in line with the bank’s very strong deflationary pronouncements of late, and indeed, the inflationary practice of quantitative easing, or printing money, as its detractors better know it.

    Guido Fawkes has the story, via Peter Oborne at the Mail.

    Writes Oborne:

    Looking back, this was a brilliantly farsighted decision because shares have since fallen in value by almost 50 per cent. It seems clear the the Bank of England fund managers understood the nature of the looming economic crisis well before anyone else.

    And adds Guido:

    … if deflation is (as the political elite and their client media commentators claim) the big threat, why is the Bank of England’s pension fund betting 3/5 of the £2.2 billion pot on hedging against inflation?


    Ha, ha, ha...

    :D :D :D
  2. Don't buy the conspiracy theory at all... Love the 'gilty' pun, though :).

    Firstly, they're still in deficit. If you claim that the trustees have access to non-public information from the Bank, why are they still underfunded?

    Secondly, if you know what's been going on with the UK final salary schemes, you would realize that the BoE PF simply did the same thing all other DB schemes were doing, i.e. allocate aggressively into IL assets. This is not a function of some sort of foresight, but rather a function of properly matching their assets to their liabilities, which are inflation-linked. BoE PF did it more aggressively, 'cause they're smaller and nimbler. All the other PFs were trying to do the same thing, but they tend to move slowly.