Bank of England 2014 pension contributions are over 50% of salary

Pension scheme only invests in UK bonds and offers generous pensions

Members do not have to contribute, all costs met by Bank of England, even in auto-enrolment

How many other employers could afford to contribute an extra 50% for their staff’s pensions?

by Dr. Ros Altmann

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Latest figures show Bank of England pension scheme generosity: In case you missed it, the Bank of England’s latest Financial Statement for its staff pension schemes shows that even the Bank itself has not been immune to the pension problems affecting other schemes (you can link to it here http://www.bankofengland.co.uk/about/Documents/humanresources/pensionreport.pdf) The Report shows a 4% deficit and pension contributions are over 50% of pensionable earnings. The amount being contributed for each member is way beyond the hopes of other workers.

All investments only in UK fixed income but don’t match liabilities: The scheme has £3billion of assets (up from £2.3bn in 2010) with no exposure to the risks of the stock market – the fund is invested entirely in bonds. (75% in UK index-linked gilts, 8% in ordinary UK gilts, 6% in quoted corporate UK index-linked bonds and 10% in unquoted UK corporate index-linked bonds). As these bonds do not rise in line with salary inflation, nor do they protect against increases in life expectancy, an ongoing deficit is likely to arise. This helps to explain why contribution levels are so high, since no allowance is made for additional investment returns from risky assets to keep up with rising salary costs and longevity. The Bank of England simply makes up any shortfall.

No room for Socially Responsible Investment: Most pension schemes invest in a broad range of assets, which allow for some extra returns above those available from gilts and bonds in order to keep up with their rising liabilities. They have been hurt by the sharp fall in long-term bond yields and have been trying to find sources of extra return to make up their deficits. In addition, pension assets are often invested in equities or in projects that have social responsibility benefits. Large pension schemes are powerful forces that can help improve corporate behaviour, however the Bank of England report specifically states that its bond investments leave not scope for Socially Responsible Investment or shareholder engagement. Other pension schemes are trying to find ways to use their assets to benefit society, but the Bank of England scheme will not do so.

But members do not need to worry: Their employer is hardly at risk of insolvency and, therefore, the Bank of England just pays in whatever is needed to their very generous pension scheme.

Bank of England staff pensions are outstandingly generous: While many private sector scheme benefits are under threat and we are used to hearing about pension deficits and problems resulting from central bank policies of Quantitative Easing, such dilemmas hardly affect the Bank of England itself. There are just over 1000 staff in the final salary scheme (with 12,500 members including pensioners and deferred pensioners) and around 1400 members of the new career average scheme. These pension arrangements are, in several ways, the envy of others:

1. Members do not pay anything at all, even those auto-enrolled: Members do not have to contribute anything to their scheme – all the contributions are paid by the Bank of England itself. Even staff who are auto-enrolled are not required to pay, the employer puts in the money for them, every penny. Most of us can only dream of a scheme like this.
2. Employer contributes over 50% of salary and costs have risen sharply: The Bank of England just pays whatever is needed into the scheme. Its pension contributions rose from under £50m in 2013 to almost £75m in 2014 as it needed to plug its deficit.
3. Both final salary and career average schemes have rpi-linked benefits: All benefits remain linked to the retail prices index (while other public sector pension schemes have been moved to a consumer price index inflation link).

It’s nice to know some pension arrangements are still so generous, despite the problems faced by most companies trying to offer defined benefit pensions to their staff.