Some little numbers from The Bank of England


¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† A number of bloggers have in recent months referred to the Bank of England’s interesting decision to switch most of its pension fund into Index linked securities at a time when¬† it was in public worrying about deflation and possible falling prices. By the Annual Pension fund report in February 2010 the reorganisation of the fund was complete. The fund showed:

UK gilts (fixed interest loans to HM government)                £108 million                         4.6%

Index linked gilts (loans to HMG)                                               £1915.9million                     81.8%

Other Index linked securities                                                          £330.4 million                   12.9%

Total assets                      £2357 million

¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† Their investment strategy, which looked smart when share markets were falling in 2008-9, looked less rewarding in a year of share market recovery. The fund managed a return of 12% to February 2010, well below returns on funds with substantial investments in real assets. The authors of the Report, aware of possible criticisms of the performance, stated¬†¬† ” It should be noted that the investment strategy now being followed is not designed to maximise return, but rather to maximise the probability that the Fund will be adequate to meet its liabilities in all future economic and financial conditions”.

                  This concentration on managing risk and cutting the deficit on the fund  also resulted in an agreement to pay into the fund 55% of pensionable earnings of all the full members of the scheme in employment from March 2010, a very high contribution level. The £2.357 billion of assets provides for a total of 13,300 members and their dependents.

                   Some have raised eyebrows that the Bank, agonising about too little inflation and worrying about deflation and double dips, should at the same time be putting in such extensive and expensive inflation proofing to its own pension assets. The Pension trustes and their advisers have had the better of the argument over inflation than the Monetary Policy Committee. The MPC  tasked with curbing inflation have consistently underestimated it or refused to take it seriously. The Trustees in contrast have made it the one risk they wish to cover fully, so they  have been less good at pursuing better returns on this large sum of public money in the better asset market conditons of 2009-11.

¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† Meanwhile the Bank’s own balance sheet shows just what quantitative¬† easing does to the financial shape of an old lady placed on a crash binge. The balance sheet has shot up from ¬£44 billion in Janaury 2007 before the crisis, to ¬£246 billion today. The ¬£246 billion balance sheet is supported on just ¬£4.2 billion of share capital and reserves. This maans the Bank is now more than 58 times geared. It’s a good job Central Banks have full government support and play by different rules from commercial banks. No commercial bank today would be allowed to gear like that.

                We all look forward to the Bank delivering on its inflation target. The trouble is there will be some more rough months ahead before it starts to do so, owing to past decisions.


  1. Gary
    January 9, 2011

    look no further for proof that the Bank is going to inflate OUR savings and pensions away to save their banks at all costs to us the people. Deflation , or reversion to the mean of 40 years of credit inflation will not be tolerated. But with total debt north of 450 percent of GDP, the currency will be destroyed before the debt. A case can be made for treason.

    1. lifelogic
      January 9, 2011

      I see Cameron is going on about how the UK region of the EUSSR is a good place to live and run a business again today. Has he ever met any business people recently (who were not being nice to him as they were perhaps after something) and so just told him the truth?

      Clearly he does not understand in the slightest what 50% Income Tax, 20% VAT, 23% combined NI, 40%, IHT, Stamp duties, Vehicle Tax, Fuel Duty, Corp tax, absurd fiscal complexity, countless licenses, landfill tax, overpriced energy and all that pointless employment and other regulation does for its actual ability to compete in the real world or to reinvest anything in the business.

      Most when asked would advise relocation out of the UK now I suspect – I certainly would.

  2. lifelogic
    January 9, 2011

    “The ¬£2357 billion of assets provides for a total of 13,300 members and their dependants.”

    Sounds like rather a lot per pensioner – roll on the state sector private sector equalisation tax 100% of everything above a pension cap level perhaps the average in the wealth creating sector. Not an easy tax to avoid either.

    This is I understand rather less than £100K as many have none at all. But to be generous lets go to a £200K limit for the state sector and 1.5M for wealth creators.

    1. Denis Cooper
      January 9, 2011

      That’s because it’s ¬£2357 million, not billion, of assets, according to the figure JR has reproduced from the fund report, but he’s made a slip in the sentence you quote. Then it works out as ¬£177K per member, rather than ¬£177 million per member.

      1. lifelogic
        January 9, 2011

        Yes I assumed an error Рonly at the BBC and the failed banks do they get close to £177M pension pots.

  3. lifelogic
    January 9, 2011

    Yes always judge this type of people by their actions with their own money, not what they say or even what they do with taxpayers or others money.

  4. norman
    January 9, 2011

    I won’t pretend to understand all, or any, of the factors that effects a currency but reading your last paragraph it seems you are of the opinion that the current course is the right one for the Bank of England to achieve the target? I also wonder what the past decision was, I imagine the ¬£200bn of printed money.

    In which case it leaves one wondering what the Bank’s governors could have done about consistently missing the target over the last four years. The printing money was obviously a political decision and it would seem rum to print money to lend to yourselves with one hand and with the other ramp up the rate of interest you (well, taxpayers) are going to be paying back for that printed money.

    Saying that we need an injection of cash to stop the economy flatlining whilst at the same time raising rates to take cash out of the economy would be bonkers, even for Brown.

    Let’s hope the optimism of the last paragraph is correct and in a few months we will see 2% inflation. I’m sceptical about that, especially with the recent tax rises, but only time will tell
    Reply: I have been calling for higher official rates for months to control inflation and reward savers a bit more.

    1. davidb
      January 9, 2011

      I think how it works is that altering the interest rate alters the distribution of the money, but does not alter how much there is in the economy. I think those in receipt of interest get paltry sums so their savings being much devalued against inflation, they carry the loss. Those who have mortgages get a benefit as their payments out are lower than they may otherwise have been which allows them to service their debts and to keep spending despite the strained economic circumstances. The value of our currency goes down because foreigners putting money on deposit can get a better hedge against inflation elsewhere, so they take their foreign money elsewhere. The government borrows on Gilt markets so it is paying 4% or so already.

      So in short, the amount of money circulating doesn’t change, its who gets it that does. The net effect of the low interest policy is that savers subsidise those who overborrowed and bought houses they could not afford. Or basically the prudent and elderly are being shafted to keep speculators in houses that are too big for their budgets. Quite shameful really, but a lesson for the next time.

  5. alan jutson
    January 9, 2011

    All these switching of numbers, accounting moves, printing of money and the like leave me cold.

    I have no problem with any FUNDED Pension scheme trying to protect its members by seeking to get the best returns on its investments, that is surely what it should be doing.

    The real problem that you outline seems to be that the Bank itself is geared by 56 times its assets.

    I am a little confused not being a finance man, but is this increase of ¬£202 Billion in its balance sheet simply due to the printing (or entering into a computer, which is even more worrying) the ¬£200 billion of Quantitive easing organised by the last Government, and was this not underwritten with the borrowing being set against the Governments/Country’s debt level.

    If the Government cannot pay back its debt (which I assume was long term) and defaults, then is the Bank of England at risk.

    Sorry if all this sounds a little simplistic, but all my life I have used but simple accounting methods in both personal and business life, where cash flow and the improvement of the bottom line have been the most important aspects for me.

    1. Sally C.
      January 9, 2011

      The 200 billion pounds worth of QE is not underwritten in any way by the government. It is simply money created electronically out of thin air and used to buy secondary market gilts. The pension and investment funds that sell their secondary market gilts to the Bof E then deposit the cheques received from the B of E into their commercial bank accounts and this in turn pushes up the banks’ reserves at the B of E. The B of E is hoping that by pushing up bank reserves in this way, the banks will all be motivated to go out and lend, thereby pushing the M4 lending figures up, and stimulatng activity in the economy. Their attitude is ‘inflation – bring it on!’ as this – to them – would demonstrate that the crisis was over. The concomittant devaluation of sterling and subsequent price inflation that we, as a major importer, suffer, matters not a jot. Nor are they bothered about any charges of market manipulation. So far, their efforts have kept the M4 lending figures in positive territory, but not by much.
      The only positive thing that I can say about QE is that it can be easily reversed. The B of E would sell its gilt holdings and the buyers, pension and investment funds, would draw down their deposits at the commercial banks and those banks’ reserves held at the B of E would reduce accordingly. The problem is that this would cause a contraction of credit and would probably take us back to square one.
      The subject that does not get discussed is the QE effect of the B of E’s daily open market operations which are designed to keep Base Rate artificially low.

      1. grahams
        January 9, 2011

        You are so right. The Bank of England’s latest figures show that total sterling deposits with the banking sector fell by ¬£250 billion over the past year. More significantly, perhaps, deposits held by “Other UK residents” and “non-residents” (ie ordinary customers at home and abroad) fell by about ¬£50 billion. I suspect that large numbers of customers are withdrawing deposits to buy assets in the hope of keeping up with inflation and some of this money, for instance from speculations in gold, oil, wheat and emerging markets, is not coming back. If it were not for the Bank, retail interest rates would rise to keep the money in and available for lending.
        And the Bank’s own survey now finds that people expect inflation be more than 3 per cent indefinitely, so the good work of the MPC’s early years has already been undone.

      2. Denis Cooper
        January 10, 2011

        But you’re forgetting the other half of the QE cycle, which meant that as banks and other gilts investors sold some of their holdings of previously issued gilts to the Bank they used the money to buy newly issued gilts from the Treasury’s Debt Management Office. So that ¬£200 billion didn’t stay with the gilts investors for long, but instead was passed to the Treasury and then spent by the government when it paid its bills.

        This couldn’t have happened if the Bank had been buying up private sector assets, which was the original intention as stated in Darling’s letter of January 29th 2009, because for example the Treasury doesn’t issue corporate bonds and so it couldn’t sell new corporate bonds to replace those bought up by the Bank.

        I think it says it all that in the end the Bank only bought assets which could be replaced by the Treasury to fund the government’s budget deficit, bar about ¬£1 billion out of the ¬£200 billion. During that period, the Bank was the only net purchaser of gilts, with private investors buying and selling similar volumes in total.

        Of course in aggregate the ¬£200 billion is still somewhere, because after it was paid to state employees and suppliers it was then passed on further when they paid their bills, so it would be spread around numerous personal and business accounts. That’s apart from whatever fraction has left the country, for example sent to Brussels.

      3. Mark
        January 10, 2011

        I don’t think it would be too easy to sell ¬£200bn of QE gilts on top of the financing remit of the DMO which will probably be about $180bn next year without buyers expecting rather better yields: besides banks will be looking for large sums to replace their Credit Guarantee Scheme and Special Liquidity Scheme borrowings that fall due for repayment.

      4. VIVID
        January 10, 2011

        Wonderful Wall of Information

  6. Sam Kirklee
    January 9, 2011

    Lets face it the Bank of England is unfit for purpose. It never gets forecasts right, it never meets it’s inflation targets, it never gets interest rates right, it never gets regulation of the markets right and most of all it has presided over the huge devaluation of the pound ever since the gold standard was abolished. With a record like that you might as well get a school playgroup to do the job, how could they be worse?

    1. alan jutson
      January 9, 2011


      Mr Cameron thought the Bank Of England and Mr King were doing a very good job in his interview on the Marr show this morning, said so in his very own words.

      As Lifelogic posted, does he ever speak to any normal business people who have to live in the real world.

  7. Javelin
    January 9, 2011

    Fantastic that they finally published this. I first reported the 2009 figures to a number of bloggers about 18 months ago – when they switched their assets before to guard against deflation. I put a FOI to the BofE back in Nov and they told me to push off.

    Clearly the BofE believes inflation is becoming entrenched and the MPC is now disconnected from the real economy as well as the BofE which appears now to be nothing more than a building where they meet.

    Cameron just said on the Andrew Marr show that inflation was the MPCs “responsibility”. Clearly he is lining them up to take the blame for inflation. I predict Osborne will reform a “disgraced” MPC later this year.

  8. Acorn
    January 9, 2011

    Don’t forget that the entire pension contribution of 55%, is paid by the employer, the BoE. No employee contributions except for AVCs. Still, not as bad as a female police officer at nearer 70%. At least she will pay a little bit of that herself.

    In the interests of transparency, the total amount contributed each year, directly and indirectly, by the taxpayer should be on the P60 and, the data published by National Statistics as time series data.

  9. Stuart Fairney
    January 9, 2011

    “It should be noted that the investment strategy now being followed is not designed to maximise return, but rather to maximise the probability that the Fund will be adequate to meet its liabilities in all future economic and financial conditions‚ÄĚ

    Orwellian Double-speak if ever there was. Maximum returns would maximise the probability that the fund would meet its liabilities. All investors invest where they believe they can safely maximise their income, risk averse or not.

  10. James Sutherland
    January 9, 2011

    The MPC/BoE and Met Office have both failed their customer – the taxpayer – disgracefully in recent years with public pronouncements, with loud public flapping about the “problem” they wish mattered in an attempt to distract us from the real problem. The Met Office can simply be de-funded and wound up entirely, since private organisations now perform the same function better anyway.

    The MPC may be more difficult: clearly, base rates still need to be set, and clearly the way it has been done in recent years is not adequate. Reverting to RPI rather than CPI as their performance benchmark would be an obvious first step; having the board members’ tenure automatically terminated if RPI remains significantly above target might then make them less complacent than they have been of late. Currently, we have a “base rate” which is no longer used as the base for anything relevant anyway, while inflation soars out of control and the MPC bury their collective head in the sand; surely Osborne can’t keep ignoring this problem much longer?

    It might be possible to eliminate the MPC as well, using a formula instead: set the base rate based on the recent RPI figures. The MPC is officially supposed to be doing this anyway, but decided to ignore their job and pretend to be scared of deflation and/or unicorn attack instead.

  11. Daedalus
    January 9, 2011

    Is that figure £2357 million or billion? It does make a significant difference? If billion, then each member has over £177 million in the fund which seems a goodly amount even by civil service standards.


    Reply million

    1. Daedalus
      January 9, 2011

      Thanks for the clarification. I wish at the age of 54 I had 177K in my pension fund!


      1. Mark
        January 11, 2011

        A standard state single pension is worth about £5,000 p.a. index linked currently Рat 3.5% annuity rate that would be capitalised at £140,000.

  12. Denis Cooper
    January 9, 2011

    Surely it’s rather misleading to refer to “the Bank of England‚Äôs” decision to switch most of its pension fund into index linked securities, when the fund is managed by supposedly independent trustees with Legal & General as the primary investment manager?

    The suggestion seems to be that the fund investment strategy has been shaped by special information or analyses which have been provided by the Bank but which have not put in the public domain, but one would have to look at the strategies adopted by other similar funds to provide evidence for that being the case.

    Reply: I am not making any allegation about information. However, the Trustees are Bank of England people and they have decided to buy IL at a time when the Bank was worrying in public about deflation which is interesting

  13. Denis Cooper
    January 9, 2011

    Regarding the expansion of the Bank of England’s balance sheet, ¬£246 billion minus ¬£44 billion equals ¬£202 billion, which is close to the ¬£200 billion of new money created and used for the Asset Purchase Facility:

    Of which over £198 billion was used to buy up previously issued gilts so that the Treasury would have no problem selling new gilts, thus enabling the Labour government to continue over-borrowing and over-spending in the year leading up to the general election without any fear of gilts investors going on strike.

    Little over £1 billion was used to buy private sector assets such as corporate bonds, even though when the facility was first set up the stated intention was to buy just private sector assets.

    Here is Darling’s letter to King, dated January 29th 2009:

    “As we set out in the market notice issued on 19 January, I authorise the Bank to purchase up to ¬£50 billion of high quality private sector assets under this facility.”

    And it is a special case, because he continued:

    “The Government will indemnify the Bank and the fund specially created by the Bank of England to implement the facility from any losses arising out of or in connection with the facility.”

    Yet within five weeks, that had changed from buying up just private sector assets, and using Treasury notes to pay, to also buying up previously issued gilts and using “Central Bank Money”:

    Although even at that stage up to £50 billion of the newly expanded £150 billion limit was still supposed to be used for private sector assets.

    I find it astonishing that media commentary on these extraordinary developments was and still is so poorly informed.

  14. BobE
    January 9, 2011

    I thought that you all might enjoy this link.
    Daily Express EU supplement:

  15. Mark
    January 9, 2011

    Under the Banking Act, 2009 the BoE is permitted to publish an incomplete balance sheet. They certainly admitted that last year’s accounts used that provision. So we don’t actually know how deep its gearing runs. I’d guess on a true and fair basis it might rival LTCM (200+) when it went broke.

    Reply: Unlikely, and anyway it is very different from LTCM as the government clearly stands behind the B of E.

    1. Mark
      January 10, 2011

      I’d double the number you first thought of as a minimum: ¬£200bn of QE plus ¬£319bn under SLS and CGS plus pre-existing assets comes to more than twice the official balance sheet total. If the Bank pretends that SLS and CGS aren’t on its consolidated balance sheet, then they should be in the National Debt instead (where they WILL end up if they have to be rolled over by the BoE under accounting rules).

  16. william
    January 9, 2011

    John- you say, correctly, the Old lady is 58 times geared.Correct. You then say it has full government support,but this ignores the fact that the government’s ability to raise money from taxation is NOT unlimited.The notion that the financial system of any nation state can give unlimited guarantees to its depositors of major banks,whilst permitting them to ignore loan losses, by the profit creation scheme of QE (borrow at the window for 0.5 percent, lend back to HMG by buying gilts at 4.5 percent) is a perpetual motion system , is clearly false.Sometime, probably this year, sterling will go through the floor.Normal service in the economy cannot restart until the banks face up to the losses on their property loans, householders understand that their mortgages may make them bankrupt, and base rate rises to 5 percent, ie level with inflation.SOMEBODY HSASD TO TAKE THE PAIN.Just as Gordon Brown was the worst PM since Lord North,King is the worst Governor of all time.

    Reply: They do have unlimited power to print and devalue.

  17. stevered
    January 10, 2011

    Yes. The system of QE is perpetual motion. I am surprised that sterling has held up as well as it has. As I queried before, the US economy is being held up by further QE, but the $, being a reserve economy, seems to be relatively unaffected against th £ and Euro. The US printing of $ is probably causing inflation for the rest of the world, but oil prices are fixed to$, so we need to be appreciating against the dollar to stay still.

    With regard to Europe, I am unclear as to whether all the refinancing of PIGS has been done by printing money/fiddling the books or not. Any answer would be welcome.

  18. John Robertson
    January 14, 2011

    What you have not mentioned is the devaluation in the £ against the dollar and, dare I say, the Euro of some 25% over the last 18 months. World commodity prices are also soaring mainly as a result of demand from the far east. With the other cost pressures such as VAT, I am surprised prices are not going up faster. Higher commodity prices and VAT are, in the long run, deflationary.
    You also dismiss the low money supply figures far too easily. Inflation is defined as the increase in prices as a result of increases in money supply. No money supply increases, no inflation. Higher interest rates now would be a mistake. The time to increase is when the money supply inctrease looks like picking up and salaries are starting to rise.

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