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?

[Whiskers4]

DH has has a gutsfull at work and has been considering early retirement. He has two pension plans and can easily cash in the lower one - in the last minute month it's gone from 28k to 25k.

My pension plan was due to pay out at 55, and I suspect I stupidly extended to 60.

[Whiskers4]

Forgot to say there's going to be a debate on a General Election in Parliament, I think on 17 October. I doubt a General Election will follow, but it's not going to be a pleasant debate and a lot of Conservative. most are surely going to feel even more unease after.

[F4chrissakes]

We are pensioners. We had defined benefits pension schemes. So, whilst we are not exactly loaded in any way, we thought we would be able to live out our days modestly well off. Not enough for private medical care, nor flamboyant holidays, but nowhere near the breadline either. Inflation was worrying us - the payout increases by 5% max even if inflation were to reach 10% (oh, wait......) and unless we go back out to work (anyone want to employ a pair of old farts with health issues?) we don't have any way to increase our income.

[Notonthestairs]

@Whiskers4

Forgot to say there's going to be a debate on a General Election in Parliament, I think on 17 October. I doubt a General Election will follow, but it's not going to be a pleasant debate and a lot of Conservative. most are surely going to feel even more unease after.

I suspect a lot of Conservative MPs will find they are busy elsewhere.

[walkingonsunshinekat]

@Notonthestairs

I suspect a lot of Conservative MPs will find they are busy elsewhere.

I doubt that, they'll rally around Truss, a GE is the last think they need or the country.
Would just introduce huge market uncertainty, probably far worse than what we have seen so far.

Truss will bin Kwarteng and the MPs will get rid of her before a GE.

[MarshaBradyo]

A GE now would be disastrous. Labour will likely win when we have one but not right now, things are too destabilised

Agree with pp Kwarteng and Truss would go first

[Bookclub99]

@BarbaraofSeville

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.

Good timing. Up around +6% since your post... so far so good. 😉

[peridito]

I'm only up to page 6 of this 13 page thread .Very grateful for the explanations and the pawn shop and Premium bond comparisons have really helped .

What I don't get is the concept of the government having a pot of money they can dip into to say bail out pension funds or as in the Pandemic spend trillions .

Is their only revenue tax payments from the population ?
And aren't we/the gov .in debt and borrowing money ? Where exactly does the gov.borrow money from ?
The BoE ? How does the BoE have money is it just by printing more ? So huge inflation ?

Help me someone please ..

[Notlabeled]

@peridito

I'm only up to page 6 of this 13 page thread .Very grateful for the explanations and the pawn shop and Premium bond comparisons have really helped .

What I don't get is the concept of the government having a pot of money they can dip into to say bail out pension funds or as in the Pandemic spend trillions .

Is their only revenue tax payments from the population ?
And aren't we/the gov .in debt and borrowing money ? Where exactly does the gov.borrow money from ?
The BoE ? How does the BoE have money is it just by printing more ? So huge inflation ?

Help me someone please ..

The government is printing money to buy their own debt back off the pension funds as no one else will buy it. They end up owing interest to themselves.

The problem isn't with the pensions buying these bonds in the first place, it's the fact the bought other investments with the promise of money they would get from bonds, money which they now won't get as no one is buying.

The whole Ponzi scheme of debt backed fiat currency is coming to end across the globe. It can't be propped up much longer, and when it all goes bang, it's going to be very very painful.

This problem has been building for decades and decades. If anyone thinks a GE will solve this they are in for a shock.

[1dayatatime]

@peridito

I hope these help:

And yes you are correct that the BoE "bought" UK Government debt in the aftermath of the 2008 financial crisis (Quantitative Easing or QE) by effectively printing money and the using it to buy Government debt and yes this is inflationary.

[Zilla1]

It might make more sense to think of BoE and UK government as fictionally separate. The BoE can buy government debt and during QE I think performed a paper exercise to cancel some of the UK debt it printed money to buy. So yes, the BoE can buy debt but if markets' confidence is lost, the other buyers of that debt won't buy it anymore and will sell what they own if they can. To be fair, when backed by a nation with a government that is competently run rather then devoted to diverting more of the pie to the top 0.1%, the 'fiat currency' (usually described by bitcoiners or gold standarders/hard monetarists) has seemed to work better than the alternatives.

[Fenella123]

@StatisticallyChallenged

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.

This is absolutely true.
Matched contributions, that's the equivalent of 100% interest right there. Hopefully the debt rate of interest is a lot less!

[walkingonsunshinekat]

The government is printing money to buy their own debt back off the pension funds as no one else will buy it. They end up owing interest to themselves

BoE isn't printing new money, its spent a relatively small amount from its own reserves.

Yields have dropped off 0.5% since yesterday, at the end of the day, a 30 or 10 year gilt from a developed country, giving a 4.5% to 4.7% return is a pretty good investment.

Once Truss reverses (which she will) order will be restored, well, at least as much as it was pre mini budget.

[StatisticallyChallenged]

@peridito

I'm only up to page 6 of this 13 page thread .Very grateful for the explanations and the pawn shop and Premium bond comparisons have really helped .

What I don't get is the concept of the government having a pot of money they can dip into to say bail out pension funds or as in the Pandemic spend trillions .

Is their only revenue tax payments from the population ?
And aren't we/the gov .in debt and borrowing money ? Where exactly does the gov.borrow money from ?
The BoE ? How does the BoE have money is it just by printing more ? So huge inflation ?

Help me someone please ..

There's a few different concepts in here which might be useful to understand

Governments normally borrow by issuing bonds of various types; these are sold to investors globally. A bond is basically a type of loan agreement with a specified interest payment and then a repayment of the principal (the actual amount of the loan) at the end. So say it's a 4% bond with a face value of £100. To start with they're normally sold by auction, so financial institutions will bid to buy however many bonds at a price of X per bond. The government receives X upfront, which gives them money to do whatever it is they need to do. They will then make a payment of interest each year (normally every 6 months) equal to 4% interest on the face value (so the £100) to the person who holds the bond. At the end of the term - say 25 years - the government will repay the last interest payment AND the face value, and the bond will cease to exist. Think of it as being a bit like an interest only mortgage, if that helps?

These bonds are highly tradable, normally, so they're actively bought and sold all the time. The price that they fetch at any given time basically depends on how desirable they are relatively to other options which are available. In the case of UK gilts, interest rates have shot up and so older gilts, which maybe paid say 2%, are no longer as desirable so people will pay less for them and as a result the price has collapsed and yields (the return you earn on them) have been pushed up.

That's normal borrowing

What the BoE is doing right now is the 21st century equivalent of printing money. They effectively create money in their own "account" and are using it to buy up government bonds (gilts in the UK) to try and stabilise the market, as it's all about supply and demand so if they buy them this should helo to reduce the price collapse. By buying them it also gives much needed liquidity to companies who need it. Printing money is often considered to be inflationary as it effectively increases the amount of money in the economy, which drives up prices. It isn't the only way to get inflation though, inflation can come from increasing demand (people having more money to spend) but also from increasing supply costs and at the moment this is a big part of the issue due to energy costs. Tanking the pound doesn't help with this as we import lots and so our imports now cost more than they once did, and essentials like oil are prices in dollars so even if the price of a barrel of oil had stayed completely static in dollars, the falling pound means it now costs us more than it did previously.

Does that make sense?

The BoE is also running a repo scheme for gilts and other assets - this is the pawn shop analogy.

[Zilla1]

'Order restored if Truss reverses' - unless the markets have fundamentally lost confidence in that instance of this government...

[Zilla1]

Perhaps in retrospct, it's surprising that for all of Boris' shenanigans, the markets didn't react like they have here. Cameron. May. Johnson. Truss. What a trajectory...

[SerendipityJane]

The real truth is money is madey-uppy. The only reason people accept printed vouchers for goods and services is because they have confidence they can use them later. Take that confidence away, and you are (to coin a phrase) "well fucked".

It's one reason why there has been such a scaremongering about cryptocurrencies. While the warning that they are shit investment vehicles is 100% correct, the real fear comes from the fact that ultimately "real" currencies are just as much a confidence scam as crytocurrencies. When you realise that, it can be hard to see the world in the same way ever again.

[StatisticallyChallenged]

@Fenella123

This is absolutely true.
Matched contributions, that's the equivalent of 100% interest right there. Hopefully the debt rate of interest is a lot less!

200% in my case - for every 1% I pay in, they pay 2% (capped at 6%/12%, sadly). And that's before you factor in the tax effect which means that what goes in from me directly is effectively double the amount I would see in my net salary if I didn't contribute (salary sacrifice, employer gives us the NI benefit).

Very roughly, I could have about 3% more take home pay, or 18% in my pension.

Unless you're hanging out with loan sharks that's going to be the better option assuming repayments are affordable. But even without the matched contribution it still will often be worthwhile vs debt payments overall.

[MarshaBradyo]

The value of anything is what someone will give to you in return though - so bitcoin or other replacement is included when talking about volatility

I understand the debt backed point a bit more as we seem to have spiralled - although look at WW2 and the reduction after. I just can’t wait for it to go down. The spending during Covid was stress inducing imo.

re the markets a few lines stuck out from people talking - there is a limit to unfunded tax cuts and that the markets don’t care if spending is cut next as long as there’s a balance restored. It’s not so much a judgement on politics but a gap and uncertainty on how that will be handled (someone else may have a clearer view)

Other stuff to get one’s head around, very interesting if the chicken game wasn’t making me feel nervous - but maybe that’s looking better today?

[Notlabeled]

@walkingonsunshinekat

The government is printing money to buy their own debt back off the pension funds as no one else will buy it. They end up owing interest to themselves

BoE isn't printing new money, its spent a relatively small amount from its own reserves.

Yields have dropped off 0.5% since yesterday, at the end of the day, a 30 or 10 year gilt from a developed country, giving a 4.5% to 4.7% return is a pretty good investment.

Once Truss reverses (which she will) order will be restored, well, at least as much as it was pre mini budget.

You think a 45Bn budget tipped it over the edge, not the 400Bn on CoVid??? 100Bn on energy caps? No it was a couple of quid a month people could keep of their own money that disturbed the market.

Insanity.

The country is bankrupt

We are facing energy blackouts, failure of businesses due to energy costs, collapsing demographics, totally unfunded pension liabilities, nuclear war, economic failure in the EU and USA, a faltering Chinese economy, supply chains still in disarray, lack of spare parts to keep infrastructure and distribution functioning.

Put that 5p back on the top rate though.

Sorted.

[SerendipityJane]

Truss is toast. When the best that can defend you is James Cleverly, you probably haven't got long enough to make cup of tea.

[lannistunut]

@Notlabeled

You think a 45Bn budget tipped it over the edge, not the 400Bn on CoVid??? 100Bn on energy caps? No it was a couple of quid a month people could keep of their own money that disturbed the market.

Insanity.

The country is bankrupt

We are facing energy blackouts, failure of businesses due to energy costs, collapsing demographics, totally unfunded pension liabilities, nuclear war, economic failure in the EU and USA, a faltering Chinese economy, supply chains still in disarray, lack of spare parts to keep infrastructure and distribution functioning.

Put that 5p back on the top rate though.

Sorted.

It was the unfunded tax cuts, yes. The way they were done with no balancing service cuts plus the lack of forecast, followed by Kwarteng's comments over the weekend. It was a reckless decision delivered in a reckless way.

[citroenpresse]

If the markets crashed so suddenly, is there any hope they could rise again suddenly? Would there be an even bigger downward spiral with a general election announcement or some glimmer of hope? Re Truss being removed, it wasn't the 1922 committee that did for any of her predecessors - all survived confidence votes. Seems more likely that if Tories can restrict to just two candidates it might be like the May/Leadsom leadership where Leadsom withdrew so only one candidate left (ie not having to ask membership).

[peridito]

Thank you @StatisticallyChallenged and @1dayatatime ,it's going to take me a while to process your helpful explanations .
My gut keeps screaming "what? ,it's all smoke and mirrors ?" And then my head says "bartering physical assets doesn't work in this day and age ,it's not smoke and mirrors ,it's a system of promise and trust "

[StatisticallyChallenged]

The UK debt level is high, but (as far as it's possible to tell with different info dates at different times) there are other big, developed economies with higher debt. The debt, in itself, is not necessarily the issue and does not mean the country is bankrupt.

I have a mortgage that's over 3x my salary - I'm not bankrupt. Neither is the country. But all debt is not equal and the reason for it and the confidence in the ability and willingness to repay is hugely important.

The market is all about confidence and so yes, the additional borrowing from the mini budget had a huge impact because it signalled to the market that we're not following the normal economic rules, that we're going a bit rogue, etc. That spooked investors and caused the pound to drop - it dropped as he was talking!