BBC News Business reports:
"In May 2012 the collective UK pension scheme deficit reached a record high of £312bn. If this persists then it will have to be paid off by employers, presenting them with a very large bill."
We're talking here of company pension schemes, and of annuities.
"The cost of paying pensions from final-salary schemes is calculated on the assumption that all their assets are invested in bonds."
We're talking here of Government bonds.
The first assumption I make here, is that company pension schemes are based on the purchase of Government bonds, and are therefore a substantial factor in the Public Debt, the reason being that the sale of Gov. bonds adds to the Public Debt.
Therefore, if we paid off the Public Debt, we would cancel all private pension schemes in the UK!
Incredible but (if I guessed right) true(?!)
BBC News Business goes on to explain:
"As the yield on bonds has dropped, so the stock of assets needed to generate the same level of pension income has gone up."
So why has the yield in Gov. bonds dropped?
Because of Quantitative Easing money printing!
In fact, as BBC states:
"One of the effects of QE is to push up the market price of government bonds and consequently to push down the yield they give investors."
So what does this mean in effect?
According to BBC:
"QE has been cited as a major reason why UK company pension scheme deficits, calculated monthly by the Pension Protection Fund, have ballooned".
This explains the reason why there is a £312 billion pension scheme deficit in the UK.
And what can this mean for someone purchasing a product in a pension scheme?
BBC says: "Meanwhile the fall in bond yields has driven down the annual income someone can obtain by buying an annual pension (an annuity) with their accumulated pension pot."
Does anyone believe that the employers (the companies) in the UK who participate in pension schemes (these are private pension schemes) will be able to pay a £312 billion deficit to their creditors?
Of note: the Mastricht Treaty prevents any EU member state from printing money to reduce the annual budget deficit or to reduce the total accumulated Public Debt.
Of note: the bank of England can print money in the form of QE ONLY with the consent of the Treasury (which is run by the Government).
Of note: the Bank of England started QE in 2008 with the bank-related financial crisis and has since printed £375 billion in QE, and uses the money to purchase assets - usually (but not only) Government bonds - from private companies, but not directly from the State (so as not to break the Mastricht Treaty accords).
As this was an interesting research, I thought of sharing it.
Here's the original link:
http://www.bbc.co.uk/news/business-15198789