A conspiracy that could wreck our pensions

published 21 September 2011

If you're saving for your retirement, or you're sitting on the sidelines ready to buy an annuity, then you need to take note of today's issue.

There's a stealth attack on and I think it's going to be very bad news for many pension funds.

Later today we're going to hear from the Fed it should make the evening news. They'll let us know their plans for getting the faltering US economy back on track. And the chances are they'll be launching something called Operation Twist.

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Be aware that any mention of this operation is going to have big repercussions for life on this side of the pond. And yet there's an eerie silence about the true ramifications of such a policy.

This is going to hit our pension fund industry hard. Frankly, it's the last thing the industry needs. I'd go as far as to say that this could be the straw that breaks the camel's back for many of our already struggling funds.

How Operation Twist will work

To understand Operation Twist, we have to brush up on a bit of quantitative easing (QE).

QE essentially creates new money so that the central bank can go out and buy government (and sometimes corporate) bonds.

The idea is that a big buyer like the Fed comes along with billions of dollars to buy bonds. This pulls the price of the bonds up, and that means the yield (or interest rate) is pushed down.

And if they can get rates down, the argument follows that individuals and businesses can borrow more cheaply. And so they go out and spend, spend, spend.

For some reason, getting people deeper into debt like this is seen as a wonderful thing by the authorities. Does it work?

Well QE does push interest rates down. That bit of the game-plan does seem to work. If you lend money to the US government for a year or two (ie short-dated bonds), you barely get any interest at all. Investors seem happy just to get their money back. More fool them!

But what's bugging Ben Bernanke is that pesky investors are still demanding a higher yield on long-dated bonds. The interest rates for 10-30 year bonds have not come down far enough for Ben's liking.

So what is he going to do about it?

The idea behind Operation Twist is that the central bank sells some of their short-date bonds (which are in high demand) and buys the longer dated bonds.

What Mr Bernanke is attempting is to pull down long-term interest rates all on his own.

In technical parlance, he's twisting' the yield curve. And hey presto, punters and businesses can get hold of cheap long-term debt and the problem of repayment is kicked way off into the future.

Will individuals and businesses go for it? I doubt it. It hardly seems like the economic environment for more debt. Whether this is a good idea, or a bad one and whether it works or not, one thing's for sure: this is very bad news for our pension funds.

The most important part of your pension is under threat

Pension funds are the normal buyers of long-dated bonds. It makes sense. Pension funds have very long-term commitments. They fund pensioners for perhaps 30 or 40 years down the line.

Pension funds home in on long bonds because they offer income and then when they hit maturity they pay out a nice big lump sum. Pension fund managers create a portfolio of different maturity bonds to match what they reckon they'll have to pay out to retirees.

But many of these funds are already struggling. QE has already driven bond prices up, so when they buy these bonds they get perilously low returns on them.

If you like to look at annuity rates in the weekend press then you'll already know the problem. The pension providers will offer you a pitiful stipend.

Operation Twist is sure to add to the misery. Ultimately, this operation is aimed at driving down the return on the very bonds the pension funds rely on most.

Time to take a more proactive approach

The authorities need to look like they're doing something useful especially during straitened times like these.

And so they meddle. First QE and now we're likely to see the Twist.

They hope that the knock-on effects of their meddling will be lost in the mists of time or if not, then the mists of ignorance.

Of course all these guys can do is rob Peter to pay Paul. They're just hoping Peter doesn't notice! This is the stealthy sort of larceny we've become used to over the last 20 or 30 years.

But anyway, here at The Right Side we don't like to gripe. When faced with injustice (or downright lunacy you take your pick), it's better to get on the right side of the move than moan about it.

I don't trust the way the financial system is heading and I certainly don't trust IFAs to captain you through the choppy waters coming.

Now is a very good time to take a more pro-active approach to your savings. And I hope that The Right Side can be of assistance along the way.

Unfortunately I don't provide a full service to help you build your portfolio I can only give you ideas I hope are useful.

If you're looking for a fully-loaded service, then I can heartily, and sincerely point you in the direction of Simon Caufield's True Value.

Few investment experts have their interests aligned with their clients like Simon. He has invested £100,000 of his own money in the True Value portfolio buying a couple of trading days after every recommendation he makes.

And his whole plan is to convince investors that they can safely take control of their own investments. That you don't need to leave yourself soley at the mercy of craven central bankers and helpless pension fund managers.

Take a look anyway. I don't think you'll regret it.

This article is taken from the free investment email The Right side. Sign up to The Right Side here.

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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.

He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.

Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.