Deficit attention disorder

9th February 2012

Pension fund deficits have been back in the news again. The latest figures from the Pension Protection Fund showed the collective deficit of private sector final-salary pension schemes in the UK had again hit a record high while a survey of more than 200 schemes by consultant Aon Hewitt found almost 70% were looking to take less or no risk with both their assets and their liabilities.

Many people can be put off investing in a company if it has a large pension deficit and such stories only serve to make them more nervous. Should they be? The first thing to note is the numbers that tend to feature in the media are the ones a company includes on the balance sheet published with its results. These are calculated on a half-yearly or even quarterly basis, can be very volatile and are often be a distraction from the real issues.

For an investor, however, the most important consideration is the amount of cash, which may otherwise have been distributed to shareholders, a company must pay into its pension scheme over time. These payments are decided by the pension fund's trustees every three years using an assessment conducted by the scheme's actuaries. At present, these calculations are often giving rise to larger deficits than they would have done previously, primarily because pension trustees use bond yields to work out what a fund's ultimate liability is worth in today's money – the ‘discount rate'. With bond yields at all-time lows, many pension fund's liabilities, and hence deficits, will have increased compared to three years ago.

Of course trustees should take matters like the abnormally low level of discount rates into consideration when they determine the cash payments a company must make, but they are only human and, just like everyone else, they are swayed by what is going on in the world around them.

Continue reading…


More from Mindful Money:

Millions face pensions chaos

Psychological barriers to investment – and why they are ignored

Where next with the financial crisis? Pension Fund default?

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39 thoughts on “Deficit attention disorder”

  1. forbin says:

    Hello Shaun,

    How long can Russia withhold oil shipments to the West ,and gas as well?

    will this result in China having that oil and gas more or less perminantly ?

    If they can do that for several months then it will be us , not them . who have the problem !

    Expect some wild oil price fluctuations


    1. Anonymous says:

      I think you mean up and much further up!

      1. forbin says:

        thanks barncatus , yes up is what I meant to say

        ( later on there might be a bit of a down if the economies collapse but that’s not a nice scenario …..

    2. Anonymous says:

      Hi Forbin,

      The 70s oil shock caused much exploring of alternatives, more efficient cars and so on. In the 1990s we had prices of $10 per barrel. If Russia disrupts supply, watch OPEC profit in short term, long term all bets are off …

    3. Anonymous says:

      Hi Forbin

      So far the reaction from the oil price is fairly mild in the circumstances as it remains at around US $111 for a barrel of Brent crude oil.

      As to China benefiting from this, well a foe of its has been planning a flanking move for a while. From today’s Japan Times.

      “Criticism of Moscow is a difficult balancing act for Tokyo at a time of warming relations between Abe and Putin.

      Abe was one of the few pro-Western leaders who attended the opening ceremony of the Winter Olympics in Sochi………

      Economic ties between Moscow and Tokyo have in recent years expanded, chiefly in exports of Russian natural gas to resource-poor Japan but also through Japanese companies’ investment in Russia.”

  2. Anonymous says:

    Shaun, thank you very much for this economic update on Russia. I know your blog does not get into politics, nor should it. However, as a Slavophile, I am sickened at the prospect of a totally unnecessary military conflict between the two great Eastern Slavic peoples.

    Sticking to economics, the Bank of Russia had intended to stop targeting the exchange rate altogether in 2015, let the ruble find its own level, and become a full-fledged inflation targeting central bank. The events of the last few weeks seem to make it unlikely that it will be able to keep to that timetable.

    Unless you know of something, it seems that Russia has no plans to calculate its own HICP. However, a September 2012 IMF report indicated that Ukraine is interested in calculating a Ukrainian HICP, and is also actively engaged in putting together owner-occupied housing series, even though OOH is still not, except for homeowner repairs, part of the HICP.

    Russia would be well advised to follow Ukraine’s example, and start work on calculating its own HICP, including an OOH component. Unlike Ukraine, which suffered a terrible housing bubble at the time of the global financial crisis, the Russian Federation has never had a housing bubble, but that doesn’t mean it is somehow immune. In any case, bubbles or not, the acquisitions approach to OOH is a logical framework, and is certainly superior to the exclusion approach adopted at present in the Russian CPI. Andrew Baldwin

    1. Anonymous says:

      Hi Andrew

      The inflation outlook for Russia looks troubled now but of course the economics will follow the politics for a while. That seems to trap Russia into a weaker phase but leaders have used foreign excursions as deflections from domestic troubles before…

      Later on today the Bank of Russia stated that it had the scope to raise interest-rates further. From Reuters.

      “The Russian Central Bank still has “lots of room” to raise interest rates and can further increase its involvement in the domestic foreign exchange market to stabilise the rouble, Central Bank First Deputy Governor Ksenia Yudayeva said on Monday.”

      Really? And the domestic economy afterwards..

  3. Rods says:

    Hi Shaun,

    Thank you for the timely update.

    Where it looks like Ukraine is going to need $30bn+ in loans over the next 2 years, where does that leave Russia’s stagnant economy if their military adventures mean that they have to prop up Ukraine against a possible backdrop of economic sanctions?

    I suspect that with global oil and gas production increasing through the US, Iraq and Iran that any current gains, due to uncertainty, in oil and gas prices will be short lived. Where oil consumption has been going up in developing countries with continued improvements in vehicle mpg, this is bound to at some point have a effect of demand. An example is that Ford from 2015 is going to produce the USA’s most popular pickup truck with sales of 0.75m a year with an all aluminum body to shed 700lb and increase average fuel consumption from 22 to around 30mpg. I know Saudi Arabia has always expressed concerns on oil pricing having an effect on long term consumption due to making improving efficiency in oil consuming industries a priority and also the development of alternative energy sources.

    1. forbin says:

      hi rods

      most nat gas issues would need an article on its own – although Nat gas will be around longer than oil its main problem is China and Japan.

      Japan starts its nukes then , with oil, the prices could well fall , but not so much as all that oil shale and shael oil that the USA has needs high prices – those fields deplete pretty quick compared to conventional fields – more capex required

      As for Irag , they’ve done well to get to 6 M , about 1/2 the projected figure – and even then IEA says they need $530 billion investment – more cost= expensive oil ( cheaper ? well yes compared to shale I guess)

      Iran , down 1M boe since santions, get those lifted and maybe….

      And for KSA – 400-600K less next year as they refine it themselves with the Chinese funded refinery .

      Going to be fun

      grab a bag of popcorn and watch the show

    2. Anonymous says:

      Hi Rods

      If President Putin thinks the same -that Russian economic power gained from hydrocarbons is about to decline- then he is even more dangerous than before I think.

      I am also reminded of the UK and the way that our political class have failed to update both our energy infrastructure and security.

    3. therrawbuzzin says:

      Increased fuel efficiency does not lower fuel consumption.

        1. therrawbuzzin says:

          Govts. have offset the relative price decrease which would have accrued with better efficiency, with taxation, and it is this which has lowered consumption.
          The “Global warming” scam is a handy excuse to increase those taxes further, eh?

  4. Anonymous says:

    Hi Shaun,

    Corruption is the big problem keeping the of Ukrainians majority in poverty. A simple economic comparison between Poland and Ukraine is reminiscent of the cold war competition between the DDR and the Bundesrepublik. My wife suggested that Putin would lavish money on Ukraine to buy popularity. I’m not sure where Russia can find the cash. Corruption means that a few oligarchs would rake off the spoils leaving little for the majority. The USSR lost the previous economic competition against capitalism – I’d suggest this is a game Russia cannot win given current levels of corruption.

    As for Russian shares, firstly the wise should have fled post Yukos and secondly, some oligarchs will profit by buying up Gazprom shares very cheap.

    1. Anonymous says:

      Hi ExpatInBG

      At the moment the Ukraine faces problems on both sides. The IMF/EU on one side with its “on track” austerity and Putin with little cash! I agree that the EU has less corruption but it has its own problems such as the 19 years of unsigned accounts.

      Perhaps Russia is mimicking China and going for the resources in the Ukraine.

      1. Anonymous says:

        Yes, the EU is structurally & legally a mess, without accountability. But people in Britain often don’t realise that the EU still works better than much of Southern & SouthEastern Europe.

      2. Jer says:

        Hi Shaun,
        I don’t think Putin is after resources, nor are Russia and China in like state.
        Like most Russians he just _knows_ that the Crimea is properly part of (Great) Russia and as such recovering it appeals to his sense of patriotism, and his ego.
        The future for Ukraine he wants is probably similar to that in Byelorussia now, a weak and compliant administration.
        I’m certain this is not about economics, or resources, just ego and nationalism.
        I’m also certain that the UK government came within an inch of misplaying this one badly, and the Americans may yet do so, idiots.

  5. theyenguy says:

    An inquiring mind asks, will the crisis in Ukraine, be a Black Swan event, one of those unforeseen investment shocks, that comes seemingly out of nowhere to turn the bull stock market into a ber stock market? John Mauldin posts Black swans and endogenous uncertainty

    On Monday March 3, 2014, World Stocks, VT, traded 1.4%, lower as Bloomberg reports Yen hits 1-Month high as Putin sparks haven asset demand. Sectors trading lower included, PICK -3.8%, SOCL -2.4, FLM -2.3, PBS -1.4, PNQI -1.3, IGV -1.1

    Nation Investment, EFA, traded 2.1%, lower as AFP reports Russian markets nosedive as Ukraine panic takes hold. Nations trading lower included, RSX, -7.0%, ERUS, -7.7, EPOL, -6.5, EGPT, -5.2, GULF, -4.2, EDEN, -3.9, EWO, -3.6, EWG, -3.5, EWI, -3.4, GREK, -3.3, GERJ, -3.1, EWD, -3.0, EWN, -2.9, PGAL, -2.8, EFNL, -2.7, with European Financials, EUFN, -2.7%, European Smal Cap Dividend, DFE -3.2, and Eurozone Stocks, EZU, -3.0.

  6. Noo 2 Economics says:

    Although the Bank Of Russia seems bent on economic destruction via alternating too loose/too tight policy, another aspect to this is the uncertainty around oil and gas supply if Ukraine goes to war with Russia.

    If this happens then we can expect a spike in oil and gas prices which the ruskies will probably be quite happy about, especially if that is accompanied by a stable/improving rouble against the yankee dollar via the tightening phase they seem to be going into. Regards the economic global impact of such a scenario, well, I don’t want to go there.

  7. therrawbuzzin says:

    The situation in the Ukraine has been fomented by the EU trying to usurp Russian economic influence in the area, and destabilising the democratically elected govt.
    Let’s get the truth of this out into the open.
    Every death is blood on Barroso’s hands.

    1. Anonymous says:

      Barrosso didn’t pay snipers to assassinate Ukrainians. Maggie Thatcher never used snipers to assassinate poll tax protesters.

      Get with the plot – Ukrainians revolted against corrupt greedy rulers. Corrupt murderers who ordered police to kill …. Where is your sense of social justice ?

      1. therrawbuzzin says:

        Woah, there.
        This was the EU’s attempt to coax Ukraine away from Russia-led economic pack to its own, which resulted in violent, far-right, anti-Russian, rebellion to the democratically-elected regime, and its overthrow.
        The “interim” govt is packed with right-wing extremists, who look to WW2 anti-Russian fascists for icons.

        1. Anonymous says:

          So what are you saying, that a foreign politician can dictate against the wishes of the Ukrainian people ?

          Draw the parallel in Scotland – you have been promised a referendum on independence. You win it and foreign troops arrive to squash your aspirations.

          1. Jer says:

            Except that isn’t the situation.

            The wishes of the Ukrainian people, were presumably to have the leader they elected. That is how we normally measure these things.

            The parallel with Scotland would be closer to – you have been promised a referendum on independence. You win it, then US forces arrive to guarantee the outcome.
            This is, incidentally, the situation that gives all sides what they want. Ukrainian nationalists get a country with a Ukrainian majority, Russia gets Crimea (back), the EU get to pose a bit and the US doesn’t really know what it wants, so can convince itself that it’s got it.

          2. Anonymous says:


            It was a simple trade agreement. It was anti-corruption protests. Plausible reports had many ethnic Russians supporting the trade agreement and opposing a corrupt president. And risking their lives by protesting for the EU trade agreement.

            The leader the Ukrainians elected president appears to have had a Maggie Poll tax revolt moment, where his own MPs and party have decided it’s time he went. The major power brokers in the parliament are the same MPs and oligarchs that previously supported Yanukovich.

            The reports of nationalists coming from 1 side’s press – I think it’s an attempt to muddy the waters. Given vested interests and conflicting press reports – I’d view all such news reports with skepticism.

            The situation is tense and the risks of a very damaging civil war are high. New elections and possible referendums offer a sane and peaceful way forward, where Ukrainian citizens get to vote.

            A Czechoslovak velvet divorce is a much better option for all, and a Yugoslav style civil war a disaster for all.

          3. Jer says:

            I work for a Russian/Ukrainian joint venture, there was never any deep love, but there isn’t any great hate now. I think it will work out either with or without a partition of eastern Ukraine, as long as Western powers stay out of it….

          4. Anonymous says:

            Let’s go back to first principles. Either Ukraine is a democracy with self determination and freedom to sign whatever trade deal it wants or we live in a Europe where the powerful countries do as they please – the Molotov-Ribbentrop pact is an example of the latter.

            The EU merely offered a trade deal, no evil intent, no military threats ….

            Hitler used ethnic Germans as an excuse in Suedetenland. The historic precedents are worrying.

          5. therrawbuzzin says:

            Expat, this is nonsense.
            In the Ukraine violent protest which overthrows a democratically elected govt counts as self-determination ?

          6. Anonymous says:

            nonsense ? it is a simple yes or no question.

            Either Ukrainians can choose their own future or they have an evil outside power dictate it, just like Hitler and Stalin decided Poland’s fate in 1939.

            Putin can easily restore democracy by withdrawing his army and allowing free and fair elections and a referendum on which trade block the citizens of Ukraine want for themselves. His actions will show his answer to the above question.

          7. therrawbuzzin says:

            Does a violent internal coup, which overthrows a democratically elected government, count as self-determination in your book, because it doesn’t in mine.

            The democratically elected MPs of the Crimea have made their position plain:


            Or, since it is pro-Russian, does that not count either?
            Putin is not an evil dictator, and it is foolish to pretend that he is.

          8. Anonymous says:

            A vast majority of Ukrainians including Eastern Russian speakers chose to reject a corrupt and murdering president. It has happened – get over it and stop whining. It is no justification for Russia’s violation of international law.

            Going forward, the world will watch and can answer my question for themselves.

          9. Jer says:

            Corrupt – certainly.
            Like all the others…
            Russia’s intervention is arguably legal (it was requested by the elected president). It was certainly inevitable, possibly irreversible, and probably desirable anyway.

          10. therrawbuzzin says:

            Yanukovich was freely and fairly elected president of Ukraine, show me the rebels mandate?
            You can’t, they don’t have one.
            You are anti-Russian and so inventing justification for a violent, bloody coup, instigated by the extreme right.

          11. Anonymous says:

            if you had a logical or sensible thread you would not need insults. до свидания

          12. therrawbuzzin says:

            Which insults?

          13. Anonymous says:

            On Aljazeera today, grey minister after grey minister, cheering the armed and violent insurrection, yet condemning the votes cast by the Crimeans and that of Sebastopol? Come on, surely, it looks like the USA is yanking everyone’s chain

          14. Anonymous says:

            …and seeing the caliber of some of those that constitute the new administration has me wondering if they are mere thugs or actually gangsters. I am leaning to the Russians and if Europe and UK decide to penalise, well let’s hope next winter is not too chilly eh!

          15. therrawbuzzin says:

            “Two groups, Right Sector and Svoboda (Freedom), are frequently mentioned and
            there are regular references to wartime nationalist Stepan Bandera, seen as a
            hero to some but accused by others of being a Nazi collaborator linked to
            massacres of Jews and Poles.

            The far right was a minority element in the protests that attracted a wide
            cross-section of support from Kiev and other cities. They were, however, often
            involved in the most violent confrontations and nationalist symbols were
            frequently visible in the square.

            The nationalist Svoboda (Freedom) party has four posts in the government.
            Oleksandr Sych is deputy prime minister and Oleh Makhnitsky becomes acting chief
            prosecutor. It also runs the agriculture and ecology portfolios but its leader,
            who has been accused of anti-Semitism, is not in the government.
            Protest leader Andriy Parubiy has become chairman of the National Security
            Council (NSC). A co-founder of Svoboda and labelled an extremist by the ousted
            president, one of Mr Parubiy’s deputies at the NSC is Dmytro Yarosh, the head of
            the far-right paramilitary group Right Sector.”

            “Part of the problem is that the government sworn in last week had little
            connection to Ukraine’s more Russophile east. One of its first actions was to
            repeal a 2012 law recognising Russian as an official regional language. The
            decision was widely criticised across Ukraine.”

          16. Anonymous says:

            In Bulgaria, Russophile and socialist Stanishev sits in coalition with Ataka’s Siderov, whom I consider a neo-nazi fascist. The Russian press appear silent over Stanishev’s dealings with fascists.

            Austria and Greece have some questionable politicians. Hungary reportedly has some nasty nationalists in power. Ukraine isn’t unique here. So you’ll have to forgive me for not panicking over the heavily controlled Russian media’s name calling about Putin’s opponents. All nationalism is bad – Ukraine’s westeners are not the only guilty party here.

            Unfortunately the Russian invasion appears to have strengthened the anti-Russian nationalists support. The Russian invasion has caused pending free trade agreements with Russia to be broken off. The invasion will probably cause a lose-lose situation for Russia and Ukraine.

            And while you mull over the issues, remember Putin has a KGB history. Remember Gulag archipeligo. Remember Magnitski. Remember Kruschev’s (and others) threats against the western democracies. Remember the blackmail and attempts to starve Berlin for a political ideology. And have a nice day – you live in a democracy that doesn’t gulag you for criticising Thatcher.

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