Can someone explain in laymans terms what is happening with the BOE/pension funds on Friday?

[Silverin]

There seems to be a lot of panicked talk in the financial media about pension funds potentially collapsing and the BOE needing to step in to help them but this support being stopped on Friday.

As a layperson, I would like to understand what is going on - what are gilts, what did the BOE do/not do and what are the risks to pension funds that could cause a collapse on Friday?

I've been trying to work out if NHS pensions will
be affected by this. This is what I have found:

"Funds from the scheme are not invested.

It is an unfunded, contributory public service occupational pension scheme.

This means that the fund has no assets to speak of and therefore no investments. All pensions in payment are paid out of current resources on a year by year basis. Any shortfalls are underwritten by the exchequer."

Does this mean they will be affected or not? Thanks to anyone who can answer 😊

That means your 99.999% fine as the government is paying yours from the annual budget money given to the NHS

It could only fail if the government went bust/bankrupt which as far as I know has never happened but correct me if I’m wrong

I don’t know what it’s about but if it’s what’s needed to stop the OAPs from voting Tory’s then so be it. I just hope and pray it won’t have a hard affect on mine or my kids in the futures

@Andypandy799

Thanks so much for this. Have been googling on and off since I read the thread last night.

@Silverin bless well yours is safe but everyone is going to suffer with inflation I’m afraid.

You can’t win either way, my mam has some good savings and needs to live off them as not entitled to help as she has them.

Since she retired they have paid her 0.5% so effectively nothing so her moneys gone down. Now she may get 4% but prices going up mean she can’t buy as much as she could last year meaning her savings are now worth less.

Like I say we are the worker bees

And just to throw fuel on the fire so to speak but how does any government now or in the past control people???? Through fear

Thank you for explaining this. I find it hard to grasp some of it.

Well you see that’s what they want. Don’t ask me who they are as that’s a whole other thread 😂

Or the government could simply decide to stop paying it. Or pay 50% of what it used to. They make the laws after all.

This would be unlikely for already accrued benefits as they form part of the contractual renumeration. The govt can and has been taken to court and lost.

Changing future benefits however...totally possible

Thanks Edwin. Fantastic and helpful posts. I saw these articles this morning and was massively confused. I’m guessing 1 is true - the BOE wouldn’t let the funds fail so spectacularly, would it? They are basically telling them to get their house in order.

I wonder why the reluctance to take up BOE offer. I’m guessing it’s because it’s a overall good or stability not necessarily individually attractive so fund think someone else can carry that

Just guessing though, up for correction

They may not be directly holding instruments which are eligible for the scheme, depending on their investment strategy. You can see the lists of what is allowed here

www.bankofengland.co.uk/markets/eligible-collateral

The funds which are well funded and directly hold lots of these assets, without lots of derivative activity or leverage are not the ones who will be struggling

The govt can and has been taken to court and lost.

The government can change the law so as nmot to lose. Like it did when the workfare ruling went against them.

Anyone who trusts the government -any government - is a fucking idiot.

Yes, stakeholder pensions are DC pensions.

ISAs and stakeholder)personal/DC pensions/SIPPS are all just tax efficient wrappers around shares, corporate bonds, gilts, unit trusts, investment trusts, etc.

The ISAs, you invest in with post-tax income and never have to pay any more tax (CGT or income tax) on the money you make from those investments.

Pensions, you pay for with untaxed income. When it comes to get your pension from that, 75% is treated as taxable, as if you'd earned it from a job (but no NI is paid).

Both ISAs and pensions level charges (small ones but still worth minimising) for holding your investments in the tax efficient wrapper.

To be fair the money going to quell the fuel problems will lower inflation not raise it. And the borrowing is not extra spending by the government - the opposite - it is a drop in income as they lower taxes.

Inflation could be affected by the Bank of England raising interest rates (but they might well have had to do that anyway) making business costs go up and of course mortgage costs. If interests rates do go up the government will need to spend more to service that debt.

It is also the case though that the amount involved is a fraction of the government finances. And the cost of the fuel bail out is looking as though it will be much less than expected because of the international fall in fuel prices anyway (government was only on the hook for the difference between amount A and amount B and if that gap closes the government spends less).

Much of what is going in is 'jitters' and jitters can be contagious. The markets were jittery anyway because of the Bank of England getting rid of some the government debt which it held. The Bank has back tracked on that for a little but is going to start again on Friday.

Elements of what is going on are happening across all markets not just the UK. We are more jittery here probably because markets don't like change full stop. New PM, new chancellor, new way of thinking. The sacking of the chief treasury civil servant and the cutting the OBR out of the picture for analysis did not help the jitters. Nor did bringing the changes in so soon and without the usual budgetary background. Not well handled but made worse by anti-Truss back benches going for her before she has even started. Starmer's entitled to pick fault, that's his job (could do with thinking of the ordinary public though in how often but what Tories like Julian Smith are playing at I don't know - and they should know better. It is like a kind of virtue signaling though they know it will affect the markets and that has consequences for ordinary people.

Words like 'chaos' when to do with markets are like words such as ' fascism' with politics - they could do with being bandied around a bit less and with regard to the consequences of exaggeration.

Don’t think anything more I can add to the thread as the pension question is answered for me so good luck to everyone maybe we could all find our own island somewhere 🤔 and live the good life in the sun

Typically the priorities for what to do with your money after food and shelter have been sorted is,

1 Pay off debt (unless interest rate is stupid low or other special circumstances, like student loans getting written off after 30 years);

2 Ensure your emergency pot is funded (the old "N months' expenses")

3 Pension contributions up to employer matching limit, or the max you get 40% tax relief on (or even more if it's a salary sacrifice scheme so you don't pay NI on contribs) up to current limits

4 ISA up to annual limit

5 Plain old savings and investments not in any tax wrapper

There are obviously edge cases but that's a starting point, other posters may weigh in with more info!
e.g. If you need to save for a house deposit because owning will be better for you than renting, you may just go up to limit for employer matched pension contribs and then rest in an ISA for example.

Problem for most people is they've not got enough money full stop...

They can, but it's much harder to do retrospectively - which is what they would need to do. They would effectively need to invalidate employment contracts going back as far as the oldest pensioner. And even if they somehow managed that they'd have to deal with such massive walkouts from every corner of the public sector that the country would grind to a screeching halt

And I'm not a fucking idiot, thanks 🙄I just don't think scaremongering helps.

What happens if a lot more people than usual decide to start drawing down pension 'lump sums' - i.e. a run on pension drawdown monies?

I can envisage people spooked (rightly or wrongly) about whether or not their pension pot is safe wanting access to some early money to stick in premium bonds and ISAs. If too many people do this all at once, what then? Is that all OK for the pension funds who have to release the cash?

(I say 'rightly or wrongly' because i think we've established that understanding capitalism is extremely difficult and therefore many people may make erroneous assumptions.)

Can I be contrary and say that for some, debt comes below pension. If you have a good employer contribution then it's not worth losing that for the sake of interest on debts, in many cases.
My employer contributes double my contribution, and that's before I consider the tax implications. So as long as I can still service debt then it's better to pay in to pension even if it means I pay interest for longer.

Not the case for all, and if repayments are a challenge it's different again.

My dad is meant to be retiring at the end of the year. I'm really worried what this all means for his pot. Timing really couldn't be worse

If you have a pension in drawdown then it's effectively a DC type scheme - you have a pot with assets in it and when you draw down money the company your pension is with will sell some of your assets (often units in a fund which has lots of underlying assets) to free up your money

If loads of people drawdown more then the value of these underlying assets could fall, but it wouldn't substantially hurt the provider as the value of your pot would just drop to match. The risk profile is totally different

The exception to this is if you are in illiquid assets like a property fund where a rapid sale of lots of units can be impossible in a falling market. But these funds generally have clauses which allow the provider to pause withdrawals - it happened a lot during the financial crisis

The more money this government spends the more mortgage rates will go up. It might improve when Crazy Quarteng shows his figures at end of October. If government spend out again on 10 percent on benefits and pensions it will end up with mortgages going up again.

Thanks, @StatisticallyChallenged - I think I understand that. I'll have to read it again though!

Would you increase your pension contributions if you were 52 and have only started a pension 7 years ago? My employer contributes 20%. My contributions currently do not match that.

I'm paying into an ISA and overpaying my mortgage (current interest rate is 4% - just fixed last week)

I qualify for state pension as was self employed for 20 years (no private pension though during this time).