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?

[StatisticallyChallenged]

@EmmaH2022

Cash is underrated IMHO.

It's a pretty awful option for long term investment. For short term and emergency funds, absolutely. For retirement 30 years away? Lunacy

[1dayatatime]

@Bookclub99

"It's all horribly messy. I don't know how this will be fixed, but the only realistic options are: 1) the Bank of England capitulates and starts buying Gilts again (this isn't a good answer because of the doom loop issue), or 2) Truss/Kwarteng reverse all their stupid tax cuts and resign.

If neither of those two things happens some pension schemes may make irrecoverable losses "

Firstly thank you for such an excellent, well written and easy to understand summary.

Kwarteng was asked today in Washington whether the BoE would continue buying gilts and whether pensions were at risk. He simply brushed off the question saying it was a matter for the BoE failing to acknowledge that it was his unfunded mini budget with tax cuts that started this mess to begin with.

We now seem to be in a game of chicken with people's pensions where Kwarteng refuses to u turn on his tax cuts and the BoE desperately wants to stop printing money to buy gilts for the inflationary reasons outlined by @Bookclub99 .

Kwarteng is clearly betting that he won't have to u turn and that the BoE will keep printing money to keep buying gilts to prop up pension fundsbecause of the risk of pension funds going bust. If that were to happen he would blame the BoE for bust pension funds and not his mini budget.

[a1poshpaws]

@Bookclub99 It certainly helped me. I feel like I've at least got a basic understanding of it now.

(Pity the basic understanding leads me to believe we're all fucked.)

[lannistunut]

@Buggsilla

Can you explain what you mean please @lannistunut 'Because the Labour party is in the economic mainstream'

They would do things that the markets consider normal (balanced budget) and do it in a normal way (full forecast). There is no way either Sunak or Starmer would have done what Truss has done, although they would deliver very different budgets both would be economically mainstream in approach.

[MarshaBradyo]

I’m still thinking about this game of chicken which is a good way to put it. Tomorrow is the deadline set by BoE iirc

Also politically this is tough. Does anyone think Kwarteng and Truss can get through this?

I can’t see it but then they don’t seem to be in the midst of being taken out by MPs etc , maybe I’m missing something

[StatisticallyChallenged]

@lannistunut

They would do things that the markets consider normal (balanced budget) and do it in a normal way (full forecast). There is no way either Sunak or Starmer would have done what Truss has done, although they would deliver very different budgets both would be economically mainstream in approach.

With Kwarteng and Truss and their "mini budget" you've got a crappy combination of factors

• completely new and untested chancellor, so no reputation with the market of running an economy well
• taking actions which fly in the face of pretty much all economic orthodoxy
• requiring massive borrowing
• during a period where the economy was already performing poorly
• and behaving in a different way to most other countries
• and doing it in a way which breaches all the usual processes (uncosted, no OBR report, etc)

That's a heck of a combination of factors, and it's sent the markets nuts. And their refusal to acknowledge that is making it worse.

You could often get away with some of these factors; a generally well regarded long term chancellor could propose something unusual and do so successfully if the markets had faith in it (Brown and the bank bailouts for example). Even an untested chancellor can make big moves if it fits with the economic consensus (Sunak and furlough for example).

But the combination of all of them looks terrible.

[Bookclub99]

@1dayatatime Very well put. I don't think the BoE will blink as that would massively undermine its credibility, potentially worsening the situation. I think a reversal of the tax cuts is the only answer, with Kwarteng thrown under the bus to protect Truss. I think it's the only logical way out of this mess from here. Let's see. If I was a betting woman, I'd say that Kwarteng will be gone by the end of next week.

By the way, there is no way the pension funds which are in difficulty will have sorted themselves out by Monday.

[marmaladepop]

@Bookclub99

Wow. That was a long post. Does it help?

Yes - thank you. Will need to read x 5 to possibly retain the information but your list was extremely well articulated. Just feel totally deflated living in this country these days.

[MarshaBradyo]

@Bookclub99

@1dayatatime Very well put. I don't think the BoE will blink as that would massively undermine its credibility, potentially worsening the situation. I think a reversal of the tax cuts is the only answer, with Kwarteng thrown under the bus to protect Truss. I think it's the only logical way out of this mess from here. Let's see. If I was a betting woman, I'd say that Kwarteng will be gone by the end of next week.

By the way, there is no way the pension funds which are in difficulty will have sorted themselves out by Monday.

If he goes they both will need to imo

Hopefully anyway

[MarshaBradyo]

But without a leadership contest as we do not have the time for it

[Bookclub99]

@StatisticallyChallenged What an excellent description of the reason why the markets puked so hard on the mini budget. What I can't figure out is why Truss, Kwarteng at el. didn't anticipate that and soften their approach. No matter what you think of their politics, they are highly intelligent people... so why this appalling blind spot? I guess we'll never know.

[Bookclub99]

@MarshaBradyo Agreed. I think they will try to save Truss by offering up Kwarteng first and hoping he's a big enough sacrificial lamb, but I think if he goes she has to as well. Let's see!

[Bookclub99]

I must admit, I am so tempted to buy the 30-year Gilt right now! 😂

[SerendipityJane]

And the MPs can't get rid of Truss, because the rules don't allow a second vote of no confidence within 12 month period.

Rules can be changed.

[walkingonsunshinekat]

@Bookclub99

@MarshaBradyo Agreed. I think they will try to save Truss by offering up Kwarteng first and hoping he's a big enough sacrificial lamb, but I think if he goes she has to as well. Let's see!

I started a thread on this very prospect just after the mini budget, i gave them 4 weeks, probably a bit optimistic but it wont be long.

Conservative Home guy on R4 this morning, said the rumour is a Sunak/Mordaunt team would be shoe horned in, no contest, as between them they got the vast majority of MP votes.

[Bookclub99]

@SerendipityJane

And the MPs can't get rid of Truss, because the rules don't allow a second vote of no confidence within 12 month period.

Rules can be changed.

They don't need a vote. All you need is enough senior people to take her to one side and tell she has to fall on her sword.

[Notonthestairs]

Ben Wallace I think would have drawn support from both MPs & membership. No idea if he'd want the job however.

[StatisticallyChallenged]

@Bookclub99

@StatisticallyChallenged What an excellent description of the reason why the markets puked so hard on the mini budget. What I can't figure out is why Truss, Kwarteng at el. didn't anticipate that and soften their approach. No matter what you think of their politics, they are highly intelligent people... so why this appalling blind spot? I guess we'll never know.

Kwarteng is coming across almost Trumpian to me just now in terms of the level of self belief and the sense that "the rules" just don't apply to him, chaos is nothing to do with him.

It's weird, he is generally known to be extremely intelligent and he has a background in real world finance, having been part of an extremely bearish hedge fund. So he absolutely should have known how the markets would react...

Is it ego and a sense that they'll all see his genius one day? Profiteering has obviously been suggested, it's an incredibly dangerous move if so though as it's so damn blatant.

I think Truss will throw him under the bus

[MarshaBradyo]

I’m just not sure Truss can keep authority if he goes and she undoes more

I agree seniors can take her out without a vote - tg! I can’t go through that again

They are in a painful spot between markets, politics and promises

[walkingonsunshinekat]

Kwarteng is merely carrying out Truss's policies, if he goes, so does she, she'll of course tough it out for a few more days/weeks but the real issue for Tory MP's is their disastrous showing in the polls & what they have to do to turn that around.

[Bookclub99]

@Notonthestairs No one would want that job right now. Talk about poisoned chalice!

[Winecrispschocolatecats]

@Bookclub99

Wow. That was a long post. Does it help?

Yours was a fantastic explanation, thank you!

[Pinkcadillac]

IMO Sunak would try and present a balanced budget, which is what the markets seem to be demanding, and that means massive cuts. Not sure if that can be achieved without touching NHS, pensions, welfare and education. He wouldn’t want to touch infrastructure or agriculture either. I guess foreign aid, culture, environment, business grants?

[BarbaraofSeville]

@Bookclub99

I must admit, I am so tempted to buy the 30-year Gilt right now! 😂

I've just done that very thing, or at least a fund that tracks UK Gilts, via Vanguard in my S&S ISA.

I think it's a sensible thing to do as part of a balanced portfolio at the moment.

[StatisticallyChallenged]

I'm not actually sure it's the debt level specifically which is the problem, it's that the reason for the debt is so poor.

I could imagine a well respected chancellor going with a budget which required debt and being ok if the reasons for it were good - energy price support or good infrastructure investment, for example. But funding tax cuts from debt isn't good rationale