An explanation would be nice.....

From the Telegraph....

The Bank of England topped up Governor Mervyn King's pension pot by £1.4m after deciding to award him an early payout in 2008.

The deal was settled shortly after Mr King negotiated a second five-year term at the Bank following a fraught reappointment process in the wake of the Northern Rock crisis. In his final 16 months as a member of the generous final-salary scheme, the Governor's pension pot grew by a third from £3.95m to £5.36m. By comparison, in the prior 12 months, it rose by £378,700.

Once he leaves the Bank, when his current term expires in 2013, Mervyn King will be eligible to draw an annual pension equivalent to £198,200 today The Bank could offer no explanation as to why the Court of the Bank decided to bring the Governor to full pension accrual before starting a second term, though it may have been for administrative purposes. Once he leaves the Bank, when his current term expires in 2013, he will be eligible to draw an annual pension equivalent to £198,200 today.

Talent must receive its just reward, even when it has been farmed off to Eastbourne.

Promises made; promises broken

About five years ago, I read an online advert for a job in the UK civil service. I can't quite remember the job title, but it was one of those cultural transformation positions that were so popular during the Blair years. You know the sort of thing; a smoking suppression adviser, an anti-alcohol campaigner, or a you-should-treat-your-kids-more-humanely consultant.

There was one aspect of the job description that I remember with crystal clarity. The job came with a non-contributory pension that was worth 16 percent of the advertised annual salary.

In these days of budget austerity, public sector pensions seem unduly generous. State pensions, on the other hand, will be insufficient to maintain a dignified standard of living. Likewise, private pensions will also be pitifully low, due to declining stock markets and near zero interest rates.

This generosity also sits uneasily with the reality that public sector pensions are running large deficits. The civil service pension system illustrates this point (see chart above). According to the Office of Budget Responsibility, this scheme ran a deficit of £1.2 billion in 2010. By 2016, this operating deficit will rise to £2.7 billion.

Other public sector pensions, such as the NHS and Armed Forces schemes are running similar large operational deficits. And don't even try to think about the deficit numbers these schemes will start to run up by 2025.

With operational deficits running into the billions, it is extremely unlikely that public sector pensions will survive in their current generous form. Nevertheless, I keep thinking about that job advert. The person who successfully applied for that job signed a contract with Her Majesty's Government. In return for their labour services, they were promised a generous pension. The government will, in all likelihood, renege on that contract.

The accounting necessity for reducing public sector pensions is compelling. Yet, one must feel uncomfortable about political system that repeatedly promises things it cannot deliver.

Extravagant commitments have been the main characteristic of modern British government for at least four decades. It is reflected in bloated public sector employment, unrealistic pension provisions, and above all, in the unsustainable rise of public sector debt.

The hallmark of future public policy will be quite different. It will be one of broken commitments, deteriorating services, and deep disenchantment.

Public versus private

An interesting comparison between public and private pensions from the Telegraph.

If a 25-year-old worker joined a defined contribution scheme — the kind used by most workers in the private sector — this year and paid in 2.7 per cent of a lifetime average salary of £50,000 a year, while their employer paid in 6.5 per cent, they would receive an annual pension of £16,023 from the age of 65.

A 25 year-old on the same pay joining a final salary scheme — most typically found in the public sector — could expect to receive £57,714.

Who will pay for those pensions?

What will Britain look like in 2026?

The Office of National Statistics reckons that it will look a lot older. It projects that there will be around 14 million people aged 65 or older. In the absence of a geriatrically targeted plague at least one person in 5 will older than today's retirement age.

How will those future pensioners survive? Can they be confident that taxpayers in 2026 will be ready to fork out and pay for generous pensions provisions? Alternatively, can they rely upon their private savings, which will hopefully survive the ravages of inflation and taxation.

Perhaps the most reliable pension is a large family. It works in the developing world, so why not here in the UK. Have lots of children, instill in them a strong sense of responsibility for their parents, and in later life just sit back, relax and wait for a large inter generational transfer of income.

Let someone else worry about overpopulation.

Housing affordability improves.....

... but not by much.

I was a little surprised by housing affordability. I was expecting the improvement to be much greater. After all, the Bank of England reduced rates to zero. Interest payments on mortgages should have come crashing down.

Perhaps the banks are squeezing their borrowers, keeping mortgage rates high, and maximising spreads between loans and deposits. This is known as the "fat spread" strategy for recapitalizing banks. Good loans become more profitable, and banks redirect those extra earnings towards covering their bad loans.

It is just another way that the Bank of England has conspired with banks to make prudent savers pay for the mistakes of reckless speculators.

Alice's bubble wrap

What does a trillion dollars look like?

Click to find out...

Bank overwhelmed in scramble for 'new money'

So it begins....

The Bank of England's radical action to inject billions into the economy kicked quickly into top gear today as financial groups clamoured to get their hands on its newly created money.

As the Bank's operation to pump £75 billion into markets got underway, it received bids worth more than £10.5 billion for an initial £2 billion of the freshly 'printed' money. With bids worth more than five times the value of the Bank's first gilt-buying auction under its quantitative easing strategy, the results suggested that the drastic action to breathe life into the economy had got off to a flying start.

Regulatory reports show 5 biggest banks face huge loss risk

Five of America's largest banks, most of which have received $145 billion in taxpayer bailout dollars, still face potentially catastrophic losses from exotic investments if economic conditions substantially worsen, their latest financial reports show.

45 percent of world's wealth destroyed

Private equity company Blackstone Group CEO Stephen Schwarzman said on Tuesday that up to 45 percent of the world's wealth has been destroyed by the global credit crisis.

US companies pull out of retirement contributions

A wave of US companies are suspending payments to their staff 401(k) retirement plans in a bid to cut costs amid the economic downturn.

Libor’s Creep Shows Credit Markets at Risk of Seizure

Moral hazard and AIG

Norway pension fund loses 71.5 bln euros

Norway's state pension fund, one of the world's biggest investors, lost 71.5 billion euros last year on its portfolio, wiping out nearly a decade of returns, the central bank said on Wednesday.

Brazil dollar outflows reach $676 mln to March 6

Fed’s Rate Policy Didn’t Cause Housing Bubble, Greenspan Says

Yeah, right.

£130bn deficit in UK private pensions

This is just another scary FT story about pensions. Nevertheless, as the year closes, it is a timely reminder that the vast majority of UK workers over 40 are heading for a retirement marked by grinding poverty.

The UK private pension system is busted and broke. It is time to wake up and smell the financial catastrophe before us. It is time to break the habits of the last twenty years; we need to cut back on consumption and seriously start saving.

A new year's resolution perhaps?

Auditors are pressing companies to reconsider how they calculate their pension liabilities and urging them to use formulas that could give rise to much larger reported deficits than would be the case if they stayed with the current approach.

Market volatility has raised questions over the so-called “discount rate” used to calculate the present-day value of a fund’s future liabilities.

The lower the rate used, the higher the present liabilities will be. The rates currently used by companies to calculate those liabilities are roughly equivalent to those on less risky high-grade corporate bonds.

However, these have soared amid the market turmoil, sharply shrinking reported fund deficits. Some schemes have actually reported a surplus even as the values of the stocks they hold have plunged.

Two recent reports illustrate the effect that changing the discount rate can have on scheme finances. Aon, an actuarial consultant, calculated this week that the 200 largest private employers’ schemes had actually seen funding improve over 2008, ending the year with an aggregate surplus of £3bn due to rising bond yields.

But Deloitte, using discount rates about one-half to one full percentage point above gilt yields, calculates FTSE 100 companies ended the year with a £130bn deficit.

US Fed announces $800bn stimulus

To tell the truth, I am getting a little bored by these stimulus packages. They are now appearing at the rate of one day.

Today it was the Fed's turn to produce a big number and splash it about town. This time, consumers will be the lucky beneficiaries. The Fed will use $200 billion to buy up credit card debt. The remaining $600 billion will evaporate in a grey haze of toxic mortgage debt.

Unfortunately, the full implications of these kind of government initiatives is rarely fully understood. In this particular case, the US government is going to use taxpayers money to help people use their credit cards. Remember, this is a country that doesn't have universal healthcare or an adequate unemployment benefit.

It is all about priorities, the sick can go to hell. The US needs spenders, not shirkers.

It all goes to prove one thing. Being a UK taxpayer might be bad, being a US taxpayer is definitely worse.

Pension crisis - it is a slow burner

After years of overconsuming, undersaving and hoping that the housing market would provide for a comfortable retirement, there is a growing realization that the UK is heading for a massive pension crisis.

The crisis is most acute in the private sector. Today, BT confirmed the extent of the problem. It is looking to minimize their pension liabilities by raising the retirement age and reducing the pension benefit. More ominously, BT might try to push some of their liabilities onto the state. BT hope to interprete "a guarantee in respect of its scheme members to cover not only all pension benefits earned before privatisation, but also benefits earned by those who remained after going public."

It is all coming together; an ageing population, a crashing housing market, collapsing equity prices, and a rising fiscal deficit. Neither the state pension nor private sector schemes can guarantee a reasonable retirement for today's workers.

There is only one solution; those approaching retirement must stop consuming and start saving.

From the FT....

BT is seeking changes to its final salary pension schemes, including raising the retirement age from 60 to 65 and basing benefits on the average, rather than the final salary, earned before retirement.

BT confirmed that talks with its unions had been under way since May and said the moves were unrelated to the 19 per cent fall in its share price on Friday after the group warned that earnings would fall in 2008-09 because of problems at its division serving multinationals.

Analysts speculate that BT may need to cut dividends, in part because it may need to step up significantly contributions to its pension scheme. However, with only 69,000 active members out of a total of 344,000, the changes to the scheme will do little to alter aggregate liabilities.

According to John Ralfe, an independent pensions consultant, these were roughly three times BT’s market value after Friday’s share price fall to its lowest since privatisation in 1984.

Meanwhile, Mr Ralfe, in a report to be released on Monday, says that if BT’s interpretation of terms of the privatisation are correct, British taxpayers could be on the hook for about £16bn of its pension shortfall if it should suddenly become insolvent.

Pension funds holding toxic assets

The FT delivered more bad news about pensions. According to some research undertaken by a consultancy called Create Research, around 8 percent of global pension fund assets are taken up by toxic assets such as CDOs, CLOs, ABS and SIBs. Around "$700bn" of these assets "could be toxic."

"There is about $400bn to $700bn of this toxic waste sitting on the balance sheets of pension funds, especially in Denmark, Germany, France, Sweden, Japan and the US."

It just gets worse....

Interest rate cuts won't work

Over the last few days, the calls for dramatic rate cuts have bordered on the hysterical. Apparently, if the Bank of England does not cut rates massively now, the world will fall into the greatest recession since the big one back in the 1930s.

There is an obvious flaw to this piece of desperate policy advice. The US central bank has already experimented with some massive rate cuts, and so far, those cuts have proved to be astonishingly ineffective at preventing a slowdown.

It is not hard to see why. The above chart compares two important US interest rates. The first is the effective federal funds rate. This is the rate that the US has been offering as part of its daily monetary policy operations. The second interest rate is the long term corporate bond yield for companies with a reasonably good but a not perfect credit rating.

The story is horribly clear; the central bank have cut short term rates almost to zero, but the long term rate faced by companies has actually increased. Those manic Fed rate cuts have been utterly ineffective in terms of reducing borrowing cuts for firms.

This should be unsurprising. Banking crises destroy the relationship between interest rates and the real economy. Banks in trouble don't go out and start new lending. Rather they cover up bad loans by issuing credits to existing customers who might be finding it difficult to make the interest payments. Credit often grows during banking crisis, but only in a malignant and unhealthy way.

Banking crises distort credit creation, which translates into higher risk premium on corporate lending. In economies with dysfunctional financial markets, lending to companies becomes more risky. Therefore, cutting rates can not prop the economy up when the banks are sliding towards insolvency. This is what the Fed has just found out after a year of negative real policy interest rates.

So why did the Fed cut rates so dramatically. It is the old fat spread trick. Bernanke and the gang wanted to increase interest margins as a back door way of recapitalizing the banks. They wanted to put the cost of the banking crisis onto savers who would receive negative real interest rates on their deposits while banks would maintain lending rates.

However, it hasn't worked. The banks are as insolvent as ever. That is why the strategy changed this week, when Bush announced that the government would start injecting new liquidity into US banks.

So, the MPC can cut rates to zero, but the policy won't stop a recession until the banks are sorted out. Firms will continue to face high borrowing costs, and investment will contract. However, low interest rates will destabilize household portfolio decisions. People will not save, and they will hold more money as cash rather than bank deposits.

What will low rates and a banking crisis do to inflation? The simplistic view is that declining credit growth will lead to a fall in aggregate demand and ultimately declining prices.

Unfortunately, things are a little more complicated. Banking crisis are associated with huge liquidity injections, that begins by sitting on bank balance sheets. However, people are forward looking creatures, they know that this massive amount of new money will lead to higher prices. That expectation affects price setting behaviour today. People begin to increase prices today because they know that all that idle money will eventually feed into the real economy.

Sure enough, we are 14 months into the credit crunch, the UK economy has stopped growing, while the US economy is now in recession. What is happening to inflation? It is at a 16 year high in both countries.