Bank of England pension fund moves into inflation-protected bonds

Bank of England Pension Fund Shuns Gilts

By Ambrose Evans-Pritchard
The Telegraph, London
Tuesday, November 24, 2009

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/6646330/...

The Bank of England's staff pension fund sharply reduced its portfolio of fixed-rate gilts and switched to inflation-protected bonds in the year to February.

The period roughly coincides with the Bank's emergency interest rate cuts and recourse to quantitative easing.

The fund's latest report shows that 88.2 percent of its L2.1 billion holdings were in index-linked Gilts or securities with a state guarantee as of February 28 this year. The share of fixed Gilts was cut back from 22.3 to 10.9 percent over the preceding 12 months.

There is no suggestion that the Bank's staff has lost faith in the ability of the Monetary Policy Committee to control inflation. The fund is managed by a team at Legal & General, which is focused on matching liabilities.

However, Stephen Lewis from Monument Securities said the portfolio shift highlights broader markets fears about Gilts at a time of ballooning public debt and unprecedented levels of stimulus.

"There is a sense of discomfort. You can't get a cast-iron guarantee of returns on fixed Gilts and nobody knows what is going to happen when quantitative easing ends. Each time there has been a suspicion that the Bank may end QE, yields spike up 20 or 30 basis points," he said.

The Bank's pension report was obtained by Adrian Ash from BullionVault.com, the gold specialists, under freedom-of-information rules. The fund shrank by L169 million last year, due to "extremely turbulent market conditions" and payments to 7,500 former staff.

The fund would have performed better if it had put a chunk of its money in the barbarous relic of gold long ago. The perfect opportunity was to start accumulating at the turn of the century, when Gordon Brown order the Bank of England to sell half the country's gold reserves at the bottom of the market. The price has since risen explosively from $252 an ounce to a fresh record of $1,170 yesterday.

Holdings in UK equities were cut from 5.3 percent to 0.3 percent over the year, or just L549,000. The return on shares was minus 47 percent, so the fund must have sold after the crash.

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