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The Bank of England's own pension fund is mostly invested in an LDI scheme.

"Andrew Bailey isn't working for salary. It's all about his pension"

An article on this site this morning suggested that Andrew Bailey, governor of the Bank of England, is underpaid for the difficult job he's doing.

You suggest that Bailey, who earns a £495k ($548k) salary plus another £99k a year in pension contributions, is paid at a rate comparable with senior vice presidents (VPs) in investment banks. 

However, this misunderstands the nature of Bailey's compensation. I am no expert on the vagaries of the Bank of England's remuneration policy, but the fact that Bailey himself receives a defined benefit pension means that the incentive for doing his role is not his yearly salary. It is the annuity value of his exit: the fact that he will receive a large pension for the next 20 years. 

Perhaps inevitably, the Bank of England's most recent Pension Fund Annual report reveals that 82% of is own investments are in Legal and General's LDI portfolio: Bailey has effectively been bailing he and his colleagues out in the process of bailing out the rest of the industry.

Source: Bank of England Pension Fund report 

In Bailey, we have someone running the Bank of England who has been asleep at the wheel for two decades while this issue developed. The issues in the liability driven investing (LDI) market have long been flagged by people in the market, and Bailey has never understood the mechanics of LDI funds. At the FCA, it was his job to understand this risk and as governor of the Bank of England he is compounding his error. 

The UK suffers from a lack of talent of sufficient calibre in the central bank. We have a poor quality individual in charge, and since the exit of Michael Saunders this summer, I struggle to see any other incumbents who could do the job. Mark Carney was a huge, huge step in the right direction, but the role has since become mired in politics. And as politics replaces competency, the poorest quality individuals rise to the top. 

In future, the governor of the Bank of England should really be someone with markets experience instead of experience in academia. The influence of the Bank on the markets these days is far too great to leave this role to a theoretician. 

For the moment, though, we have Bailey. And Bailey is not competent. This doesn't matter to him: he is not working for this year's salary. He is working for his next 20 years of pension. Markets practitioners who think the role of Governor is underpaid might want to keep this in mind. 

James Stevens is a pseudonym

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AUTHORJames Stevens Insider Comment
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  • Ac
    Actuary
    13 October 2022

    What a terrible fundamental misunderstanding of how DB pension accrual is calculated. A simple Google search would tell you the formula that BoE uses to calculate its staff's pension entitlement. Unless Bailey works there for between 95-120 years he is not getting a 495k pension. Calm down love.

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