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

I received an inheritance which a financial advisor helped me invest. A good chunk was invested in Gilts as I’m quite risk averse. My investment portfolio did well in its first year but has taken a hammering the last few weeks. Any gains made have now gone and then some. My advisor says not to panic and sit tight as the fund managers know what they are doing but I’m worried. That money is supposed to secure my family’s financial future but the losses continue.

Beautiful explanation Bookclub99. Even I, after 2 large glasses of red wine, understood it.

Bow says it has no means left to protect the market from what is a political party.

If it intervenes more, it makes the situation worse.

The doom loop scenario cannot be allowed to play out anymore as its not fixing the problem. Its a short term fix which requires a political solution not a sticky plaster.

If the BoE continue the risk is all the pensions will go pop. And it won't matter if there is a protection scheme because that will go pop too as there will be insufficient funds.

Hence the BoE have had to say there is nothing more they can do. The pension funds can not continue to finance pension through this type of funding because they are effectively insolvent and cannot pay it back. And the government is just making it worse.

The BoE making such a statement is unprecedented as its a challenge to government. Its not supposed to be political yet saying to the government 'you are fucking up' is a political act. But also one that a responsible BoE have no choice but to say for the sake of the economy.

Its been known for a while that final salary pensions couldn't continue because pension funds weren't big enough. Hence they closed then and everyone after got worse deals to fill some of that gap. Now that gap has got bigger... So how does the gap get filled?

Its scary for pensioners who don't know if they will get what they thought. And it's scary for working age people who don't know if they will get anything and may have to pay extra tax on top of that, as well as needing to save more. Keeping in mind that inflation.

I think the fear here is that inflation could run away too.

BoE are suggesting unless the government change course we are headed for either something akin to Iceland or worse - an Argentina type scenario.

Its hard to see how the Chancellor can survive tomorrow and tbh its hard to see how Liz Truss will survive at this point. How on earth do the Tory manage that? They can't get rid of her by force by the end of the week either.

This isnt just about money. There is a risk of civil unrest if things go tits up.

This being pointed out by the BoE also terrifies markets. It suggests London isn't a safe place to invest. Which for a government set on a plan for growth kinda fucks the plan which relies on economic confidence in government.

Doom loop as a phrase doesn't really cut the mustard.

Taxes MUST go up. And cut probably will have to happen now, which might have been avoidable without the mismanagement.

That condemns the Tories to politicial oblivion. The GE will be a formality. It doesn't mean Labour have better policies or their improval ratings are going up. It means Truss has fucked it so badly its irredeemable. This is actually scary because it means the next government will also have a lack of accountability and oversight too. No one should be happy about this, regardless of political persuasion.

Everyone crapping themselves about nukes is looking in the wrong direction.

www.itv.com/news/2022-09-28/why-the-mini-budget-threatened-to-bankrupt-pension-funds

Hopefully the link above works, it made everything very clear for me.

@Bookclub99. Bravo! I finally understand. Thank you

I'm not sure it is possible to understand the logic at the moment.

If the UK financial system and inflation is a building on fire and the BoE is the fire fighters trying to put it out, Truss and Kwarteng are like two idiots throwing petrol on the fire and rocks at the fire fighters.

The financial markets and the investors are like bystanders looking on and shouting WTF and running around with their heads in their hands.

It was the first explanation I've understood. Thank you @Bookclub99 I wonder if the LGPS could fail?

Yes! Thank you, this also helped me.

Thank you all for the explanations.

Usually they have borrowed money against those gilts in order to buy more investments. It's like if you wanted to invest in the stock market but you had no cash, you could (in theory) get an unsecured loan from the bank and use that money to invest, but you might choose to take out a second mortgage instead, because the interest rate would be lower (as it is a secured debt). Their loans are secured against the gilts they own. But their loans have added conditions: the gilts they use as security must be worth enough to cover the debt if they were sold today in the open market . It's kind of like if your house is in negative equity - you can still afford the payments and you're still living in it but if you were to try to remortgage, the market value of the house wouldn't cover the loan. And banks aren't so easily able to call in their debt in that situation, because otherwise lots of people would lose their homes in a financial crisis, so "all" that happens in that situation is that they will put you on SVR and you won't be able to get a remortgaging deal at another bank. But with the gilts loans, they need to either pay back some of the debt or find more gilts to offer as security. So then they start selling gilts to pay off the loans, but that sends the prices down, so then they need to pay more back, so they need to sell more etc... and that's the doom spiral, or fire sale, it's often called that too.

Yeah that was a great post thanks

And why the price of the 2% giltsgoes down - basically nobody will buy them at face value because they can get 10% (in your example) on new gilts, so they will only buy old gilts at such a discount that the the interest paid plus the face value (that they get back at the end of the term of the gilt) adds up to the same return as if they bought the 10% ones. That is quite hard to calculate, so I don't know that that was a very understandable explanation sorry!

@Bookclub99 thank you so much!!

so an easy way out of this doom loop mess is actually to call a GE and get rid of Truss and her government?

who can make that happen?

BarbaraofSeville

I can just picture this as a cartoon!

Ok ... I'm getting glimmers of understanding, and thanks to those who created the fantastic posts that helped me.

But. What I now don't understand is WHY did 'old Truss/Kwarteng' do this when surely they knew that announcing cuts would trigger frantic sales in gilts ? What was/is their plan? Not even I can believe that a Tory PM woke up and said 'Oh I know, let's completely fuck up the economy' ?

Fab way of putting it and like the lyrics of one of my fav songs the roof is on fire but it’s raining outside

Is this not the reason they abolished bankers bonuses and kwarteng was seen having lunch with bankers after the mini budget.

Everything is binary when there is a winner there is a loser and we’re not the ones winning 🤔

@ButStillSomehow sorry that last reply was for you

Vote of no confidence in government is the most obvious answer. Which tory backbenchers support. This is different to the 1922 Committee route which took out Johnson. The problem for the 1922 route atm, is the party rules don't allow for a challenge to the leadership in such a short period. Truss currently has immunity. They could change the party rules but this requires a vote and is time consuming. This situation is much more urgent and needs action on Wednesday not next week.

If the pm fails a vote of no confidence in the Hoc, she has the choice to either resign or a ge is called. If the PM resigns without calling an election then there is a period within someone must be put forward someone who can claim the support of the house ie get a majority of MPs to support them - this is usually along the lines of having the support of majority party but it doesn't have to be. In theory it can be a cross party government. (see WWII). The Tory party could put up a temporary leader if the members agree to it (with the view to having a leadership contest which is a risk to the markets in its own right as the government is effectively in limbo until conclusion of that with the temporary leader somewhat handicapped over making significant decisions. The markets won't like this uncertainty and lack of anyone in real control) or they could simply agree on a single candidate to be PM without the need for an internal party election.

Problem with this is, atm, a GE means tories voting to make themselves unemployed. Which is why most won't take the risk. And the Tory party is so factionalised it would be incredibly hard to come to agreement on an annioted successor to Truss. You really can't rule out Johnson in this scenario btw - he is perhaps the only person I think the party will think can pull it off.

commonslibrary.parliament.uk/votes-of-no-confidence/

Details of how it works here

Thanks @Andypandy799 . It just seems impossible to take in. Or rather - it's not impossible to believe those in power are corrupt enough to want to ensure they get money at any cost. It's impossible to believe that they could do it so blatantly and we, the British public, simply say 'Bastards, now how do I cope with the mess they've made?' and NOTHING HAPPENS.

How do they get away with this ??? I don't think of myself as naive but I am bewildered and incredulous. The BoE says 'this is a disaster' and they do it anyway????

OMG @RedToothBrush - thank you for that clear and helpful explanation but OMG. So the best we can hope for is BJ back ? Gove instead if we're 'lucky'? We are genuinely and profoundly fucked.

Thanks for that explanation RedToothBrush.

It seems we're waiting for politicians to do the right thing.

Not sure I've ever felt so concerned about the future of the country.

@ButStillSomehow they have done it time and time away and then just make up other schemes to keep doing it. I don’t want to spout conspiracy theories on here but it’s been happening since 1920

Think of covid and when shares crashed, pension funds lost money for the normal folk and who do you think buys the cheap shares and houses in a recession?