UK to start paying off perpetual bonds.

A 100 years ago, the British government decided to consolidate a variety of its debts.  In effect the government took out debt consolidation loans.  These loans got the name "Consols".

The debts consolidated read like a history of the UK including costs from Napoleonic wars and even the South Sea Bubble Crisis of 1720.  

Now, the UK government has now announced that it will begin "calling" - or redeeming - some of these debts - in effect finally paying them off.


Consols are interesting not just because of the slice of history that they provide, but because they are also perpetual bonds.  The pay a fixed coupon forever.  They are valued using the simple formula:

A recent quote shows a 2.5% consol trading off a yield of about 3.86%.  This would price the bond at:

The Economist has a nice article about the introduction of Consols. (Might be behind a paywall).

As a side, from this picture of one of the bonds that was consolidated.  It is pretty clear why we call interest payments on debts "coupons"!

Perpetual securities are actually not as rare as we might think.  Another similar type of security is Preferred Stock - which pays a fixed dividend forever.   Berkshire Hathaway (Warren Buffet's firm) bought a big chunk of preferred stock from Bank of America a few years back.

How fees are destroying pension wealth in the UK

As readers of my blog will know, I frequently rant about fees charged by investment advisors.  In most cases, the people getting ripped off are individual investors.  But in a recent report on the UK pension system, it is revealed that fees paid to City advisors (the City is the UK equivalent of "Wall Street") are so high that in many cases the pension funds are paying all their gains out in fees.  And it's getting worse.

The average equity fund manager makes explicit that they are charging about 1.5% a year of the sum invested for their services, but additional hidden expenses average 0.3% a year and trading costs cut a further 1.4% off an investment. And the situation is getting worse, according to the analysis, which found that charges had increased by 9% in the last decade. The presentation added: "If the trend of diminishing returns and increasing costs continues we could soon expect negative returns on average."

The mind boggles.  There is absolutely no reason why fees should be increasing, furthermore, management fees should not exceed 0.5% for large funds.  The trustees of these pension plans need to start shopping around more.   I'll give them one piece of advice for free.  Try indexing.   It's cheap and it works.

Healthcare in the UK

With all the talk about healthcare reform, the topic of systems in other countries crops up a lot. For example, Britain's NHS is frequently portrayed as a disaster by the media in the US.

This short documentary (again on Frontline) talks about the UK system. This is clearly not the solution for the US, but I think it indicates that there are, perhaps, alternatives that work pretty well. As always, its all about getting the incentives right.

Socially useless banks?

From the Guardian newspaper... Lord Turner (top financial regulator in the UK) wants to tax "excessive profiteering" by "socially useless banks" in the UK.

All this sounds like a slippery slope to me. What is "excessive" and does he really think that banks are "socially useless"? He also talks about "simplistic regulation". I don't think it was lack of regulation that lead to the particularly bad financial mess in the UK, just bad regulation. In particular, the government took the implicit role of lender of last resort to banks that are too big to fail. Instead, the government should regulate capital standards that are a function of the bank size.

Elsewhere in the article Turner questions whether the financial sector has grown too large. In a free market, capital will move to the the most productive use. In the UK, this turns out to be the financial sector, in part because there isn't much in the way of a significant manufacturing sector anymore. The only way that I could conceive that the financial sector was "too large" is if it is receiving some sort of government subsidy, such as an implicit guarantee. In which case, we know who to blame.