15 Million Brits Losing Savings in Blair's Supposed Safe Bet

March 21 (Bloomberg) -- About 15 million British citizens who were forced to invest in the domestic bond market are losing their savings, and the government is telling them: Too bad!

Prime Minister Tony Blair and Chancellor of the Exchequer Gordon Brown forced the U.K.'s 760 billion pound ($1.3 trillion) pension industry to increase investments in sterling-denominated bonds starting in 2004 after the collapse of funds left tens of thousands of workers without retirement savings.

The cure of a government-mandated investment plan may be worse than the disease caused by letting pension funds make their own decisions. This month alone, the funds lost almost 3.8 billion pounds on domestic bonds, including 870 million in corporate debt. The loss equals 460 pounds for every retiree receiving a company pension, or more than three weeks' average income, according to calculations by Bloomberg.

``It's probably going to cause a lot of pensioner poverty in the next 10 years,'' said Roger Turner, executive officer of the Occupational Pensioners' Alliance, a lobbying group based in Crewe, England, that represents 1.5 million Britons.

``I had hoped to retire in two years, and that's likely not possible now,'' said Turner, a 58-year-old botanist who studied plant viruses and parasitic worms at the U.K.'s oldest agricultural research institute. ``I'm sure that's true for a lot of our members,'' he said in an interview from Dunstable, England.

Accounting Rules Change

The rush by pension funds into corporate bonds was fueled by a 2001 change in U.K. accounting rules that required companies to calculate retirement plan shortfalls using bond yields, and a 2004 Blair initiative to close fund deficits. The rush turned into a stampede last year when the government required companies to disclose any pension gaps on their balance sheets.

U.K. pension funds now have 35 percent of their assets in bonds, up from 31 percent in 2003, Mercer Investment Consulting, the London unit of New York-based insurance broker Marsh & McLennan Cos., said yesterday. UBS AG, Europe's biggest lender by assets, estimates retirement accounts hold about 47.1 billion pounds of pound-denominated corporate debt and 90.1 billion pounds of U.K. government bonds.

The leader of Britain's Liberal Democrats criticized Blair last week for failing to compensate pensioners for losses in their pensions. The government had previously committed to ``offer redress as a matter of principle,'' Menzies Campbell said during Blair's weekly verbal jousting with opponents at the prime minister's question time on March 15.

Blair's Question Time

Costs for pension losses would be too high, Blair said. The payments would total as much as 15 billion pounds and would set ``a precedent of extraordinary financial proportions for this government and any other,'' he said.

By 2046, one in four Britons will be retired, up from about 16 percent today, government forecasts show.

Forcing pension funds to make investment decisions based on their liabilities is ``the dumbest thing ever thought of,'' Con Keating, former adviser to the Organization for Economic Cooperation and Development on pensions, said in an interview in London.

That may be one of the reasons why no other country has adopted the U.K.'s pension rules.

Parliamentary Ombudsman Ann Abraham said last week that the government should pay 85,000 pensioners who lost savings in corporate pension funds that couldn't meet their obligations in the past decade.

`Pensions Promise'

In a report titled ``Trusting in the Pensions Promise,'' Abraham, who investigates complaints against U.K. ministries, said government-sponsored promotional materials from 1995 until last April assured investors ``that their pensions were safe.'' The pamphlets describing the pensions were ``incomplete, inconsistent, unclear and often inaccurate,'' she wrote.

Debt due in 15 years or more favored by pension funds dropped 2.5 percent this month, the worst performance since December 2003. A flood of new bond sales and rising yields on government debt sent pound-denominated securities into a tailspin this year.

The 22-basis-point increase in yields of bonds due in 15 years or more erased 42 percent of the drop in yields from 2005, Merrill Lynch & Co. data show.

A 25-year Citigroup Inc. bond sold at the end of February declined 4.5 pence on the pound, sending its yield up 40 basis points. The drop means an investor who bought 1 million pounds lost more than 48,000 pounds in a month.

Corporate Sales Increase

Company bonds are ``beginning to look tired,'' said Peter Moore, the investment director at Henderson Global Investors in London, which has $61 billion of fixed-income assets under management. Moore said he advised pension clients to avoid corporate bonds.

Companies are preparing to sell bonds in the U.K. before yields, which fell to 50-year lows in January, rise much.

Tesco Group Plc, the U.K.'s biggest supermarket operator, based in Cheshunt, England, and HSBC Group Holdings Plc, Europe's biggest bank by market value, contributed to a record $53.6 billion of new bonds in the U.K. this quarter after regulators sparked a yearlong bond rally with the changes to pension rules.

``The sterling investment-grade markets have faced a supply headwind,'' said Jamie Stuttard, who helps manage $10 billion of U.K. corporate bonds at Schroders Plc in London. ``Corporate bonds have done exceptionally well in the last few years and our view is that there isn't a great deal of value left.''

The average yield on corporate pound-denominated bonds due in 15 years or longer is 4.89 percent, according to Merrill. While down from 5.24 percent at the end of 2004, the yield rose from a 4.48 percent on Jan. 18. The premium borrowers pay above government debt rose to 62 basis points from January's low of 59.5 basis points.

Best Returns

The new rules helped bondholders earn some of the best returns until January. Long-term pound-denominated company bonds paid 11.5 percent last year, the most since 1998, beating European and U.S. corporate bonds as well as emerging market securities, Merrill data show.

Pension fund demand drove the yield on 30-year U.K. government bonds to 3.68 percent in January, the lowest since 1954 and below the Bank of England's interest-rate target. Gilts due in 15 years or longer returned 10.9 percent in 2005, the best year since 1998, Merrill data show.

The rally turned into a rout this year as the U.K. economy shows signs of accelerating. Yields on 30-year gilts rose 33 basis points since mid-January, the biggest two-month jump in a year.

Gladstone Box

Blair's government may provide more reasons to sell bonds tomorrow when Brown brings his red ``Gladstone box'' -- the valise named after former chancellor William Gladstone that contains the fiscal 2006-2007 budget -- to the House of Commons. Brown is likely to announce record bond sales.

The U.K. will increase debt issuance by 34 percent to 70 billion pounds, the most since government records began in 1990, according to the median forecast in a Bloomberg survey of 13 gilt dealers Jan. 26 and Jan. 27.

The firms forecast sales of debt due in at least 15 years will rise 43 percent to 25.7 billion pounds as Brown bows to pressure from retirement groups that say there's a shortage of bonds. The U.K.'s biggest dealers and investors last month begged the Treasury to sell more long-term debt.

``A wide range of factors may influence investment decisions'' by pension funds, Treasury spokesman Tom Youldon said when contacted yesterday by Bloomberg News. ``The pension regulator doesn't specify particular asset mixes.''

Blair spokesman Tom Kelly referred questions about losses in bonds and pension rules to the Treasury and the Department for Work and Pensions. ``Hopefully the buck doesn't stop at Number 10,'' Kelly said, referring to the prime minister's Downing Street address.

Fiona Ludlow, a spokeswoman for the Department of Work and Pensions, referred questions to the Treasury when contacted last week.

Millions at Risk

Millions of retirees may find they don't have the cash they thought if pension managers keep stuffing bonds into the funds, said Neil Duncan-Jordan, communications and development officer at the National Pensioners' Convention, a pensioner rights group in London with about 1.5 million members.

About 73 percent of Britain's pensioners rely on income from occupational pension plans, according to the Department for Work and Pensions. Payouts from such plans averaged about 137 pounds a week in the year ended April 2004.

Bond buying will continue as long as the government forces retirement funds to value their liabilities using company debt yields, said Denis Gould, head of fixed income at AXA Investment Managers in London.

``Pension funds are looking to match their liabilities and that means they're looking to buy long bonds,'' said Gould, who helps oversee $52 billion.

Chasing Your Tail

Mercer estimates that 83 billion pounds of pension liabilities aren't covered by assets, 10.6 percent more than in January 2005. The increase was caused in part by the drop in bond yields, according to Mercer.

Buying bonds to make up the losses drives yields lower and widens the shortfall in company pension funds, something Adair Turner, chairman of the U.K. Pension Fund Commission, called the ``chase-your-tail effect'' in a January speech to the World Economic Forum in Davos, Switzerland. Turner declined an interview request by Bloomberg last week.

Britain's Pensions Regulator said it isn't forcing funds to buy any particular security. Pension trustees should seek ``advice from their professional advisers on suitable investment strategies,'' London-based spokeswoman Amy Balchin said.

Paul Clark, a managing director at JLT Benefit Solutions Group in London, a unit of consulting company Jardine Lloyd Thompson, said the regulator's perception of preferred pension investments is clear.

``Pension funds are getting out of equities,'' Clark said in an interview. ``The regulator may not have told them to, but by setting the basis for calculating liabilities as bonds, they effectively have.''

To contact the reporter on this story:

Sebastian Boyd in London at sboyd9@bloomberg.net

Last Updated: March 20, 2006 19:12 EST