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?

[ClaudineClare]

@JS87

Am I correct in assuming a DB pension is one where it promises to pay you (e.g.) 1/80th of your final/average salary plus a lump sum of 3 x final/average salary?
Examples include NHS, USS and possibly teachers pensions?

Yes. But as I understand it this issue affects private sector pensions not public. I could be wrong though!

[StatisticallyChallenged]

@JS87

Am I correct in assuming a DB pension is one where it promises to pay you (e.g.) 1/80th of your final/average salary plus a lump sum of 3 x final/average salary?
Examples include NHS, USS and possibly teachers pensions?

Yes - DB = defined benefit, so as long as you meet whatever commitment is required for you to earn the pension (could be service, could be service plus contribution) then your pension is guaranteed. Risk, and responsibility for having enough money to make those payments, is with the employer

DC = defined contribution - you/employee/both pay in an amount each month but once that money is paid in then risk is all on you. If fund values plummet you'll have a smaller pot and smaller pension. Risk of living a long time is on you too, unless you buy an annuity

[JS87]

USS is private sector pension apparently.

[ArtHistory]

@Bumpsadaisie

Thanks to everyone for the incredible explanations on here.

One burning question is why did Truss/Kwarteng do this? Were they poorly advised? Did they not foresee that this might happen? Did they think it was a necessary "pain" we need to forge through to get to a better place?

Are they just very grandiose and out of touch with reality, psychologically? DId they think it would just all be alright?

Both are highly intelligent and educated people so just saying "they're tory bastards" doesn't really work as an explanation ...

The Rest is Politics is very good at analysing this (Rory Stewart, ex-Tory, and Alastair Campbell ex-Blair spin doctor). Their take, and I think this is probably the most likely explanation is that Kwarteng and Truss are pure neo-liberalists - this is an economic theory that says the markets will sort it out, the state should not interfere, that the best way to encourage people to work is to pay lower benefits, that the best way to encourage growth is to reduce the tax burden on companies and entrepeneurs. And growth is the ONLY goal worth pursuing, because it makes everyone richer. (Everyone gets the same slice of the pie, but the pie has grown).

The slightly darker view is that dark money (big oil, big tobacco, oligarchs) fund some of the think-tanks (the IEA, the Taxpayers Alliance) that espouse these views, and that the think tanks have then heavily influenced Truss and Kwarteng - so much so that they were genuinely shocked that the markets reacted the way they did to the budget. They believe that the only people who don't 100% agree with the neo-liberal approach to encouraging growth (i.e. growth at all costs, led by the markets and bugger the consequences) are people who must therefore be against growth (the anti-growth coalition).

I don't believe that Truss and Kwarteng are necessarily evil, but I do think they're utterly devoid of compassion and have no ability to understand a different viewpoint. Rory Stewart tells a story of Kwarteng which I think is very telling: He was at a dinner party and got into a debate about some point or another, where the person discussing the point was a renowned expert in the field. After a few minutes Kwarteng turned to this guy and just said "i'm not interested in this discussion" and ended it. He is the sort of person who is so confident in his beliefs (Eton/Oxford/PhD) that he has an unshakeable belief that he is right.

[Alexandra2001]

@TheFrendo

Some/ many pension funds mucked up. They took bet/position that backfired. The government decided to bail them out and have used our money to do it.

This creates further moral hazard and does nothing to make folk behave more prudently.

Thats completely false.

Gilt were stable and considered a "safe" bet, that changed when inflation/interest rates went up BUT even then, still ok.

Truss then decided to borrow to fund tax cuts, that caused Govt Gilts to effectively become worthless (as no developed economy does this) hence the BoE stepped in to buy them as no one else would.

Yields are over 5% , this creates even further problems, as Govt now needs to borrow even more to fund increased borrowing interest rates (yields) but investors don't want to lend to the UK, no other G7 comes close to having effective interest rates like the UK's.

Pension funds were doing just fine pre the mini fuck up .... investing in Bonds and Gilts is what pension funds have been doing for decades.

This is a crisis solely caused by Truss and she has been called out on this by former chancellors, international investors and the IMF.

Rees Mogg now calling Gilts a ^high risk" investment FFS.

[venus7]

@Getoff

Vinniepolis explanation is my understanding of the original issue, I'm not aware of any news about Friday though.

Although Kwarteng may have elbowed these pension funds in the ribs, if they fall off a cliff, it will mainly be the pension fund manager's fault, for standing at the edge of the cliff for the past several years. Murphy's law says that what can go wrong will go wrong, so if you stand at the edge of a cliff for long enough, eventually something will happen to put you in the rocks.

The Governor of the Bank of England has stated that he will no longer bail out the government from Friday, which means the market is very jittery because almost anything could happen; and we have a fiscally irresponsible Chancellor and PM.

[ArtHistory]

So apparently the risk to pensions isn't just limited to pensions. The bigger concern is that if the pensions collapse, they will bring the banks down with them (as the banks are the one providing the collateral). If you think about how much is in pension scheme v how much was in credit default swaps, you can get an idea about what the BoE is shitting itself about - it would make the 2008/9 financial crisis look like a walk in the park.

[MarshaBradyo]

@ArtHistory

So apparently the risk to pensions isn't just limited to pensions. The bigger concern is that if the pensions collapse, they will bring the banks down with them (as the banks are the one providing the collateral). If you think about how much is in pension scheme v how much was in credit default swaps, you can get an idea about what the BoE is shitting itself about - it would make the 2008/9 financial crisis look like a walk in the park.

Unbelievable - seeing this again that is

We can’t bail them out this time though?

[MyAnacondaMight]

One burning question is why did Truss/Kwarteng do this? Were they poorly advised? Did they not foresee that this might happen? Did they think it was a necessary "pain" we need to forge through to get to a better place?

Nobody understands the logic. There doesn’t appear to be any sound economic basis for that budget - just an idealistic view that rich people need to be made richer - which apparently, in turn, helps poor people. The fact that it doesn’t help poor people isn’t remotely concerning for Truss or Kwarteng.

Its especially fucked up because the Bank of England are taking one strategy (control inflation) and then the current government are taking the other (try to spend their way out of a recession). It’s like the analogy above re the BoE as fire fighters and the government as arsonists.

[Alexandra2001]

Both are highly intelligent and educated people so just saying "they're tory bastards" doesn't really work as an explanation

History is full of examples where so called intelligent and educated people do very unwise things.

Intelligent people smoke, refuse vaccines, start wars!!!

Truss/Kwarteng are now far right politicians, driven by ideology, like religious zealots.

[RedToothBrush]

@TheFrendo

Some/ many pension funds mucked up. They took bet/position that backfired. The government decided to bail them out and have used our money to do it.

This creates further moral hazard and does nothing to make folk behave more prudently.

See this is the thing.

A few people talked up thread about what to do about their pensions and whether they are worth it.

Its hard to say and it's difficult to counter.

Our entire financial system is built on the premise of continued growth. There is a lot to say that's unsustainable and many have predicted for years that we would hit a peak then decline quite rapidly. And this isn't unqiue to the uk. Its global. If that is true then everywhere will inevitably hit a crash at some point.

However I certainly wouldnt say to abandon pensions without really thinking about it.

The thing is that a sizeable number of people closest to retirement age, if they lose a lot, are liable not to continue working or think of other sensible ways to deal with the issue. They are at risk of looking for high risk strategies which leaves them open to being either scammed or losing even more.

We know there are already big issues with foreign exchange dealing scams, cypto being a disaster area and stuff like buying wine or whiskey thats either worthless or doesn't even exist.

These are areas that are unregulated and even less transparent.

The other area that people often look to invest in is the buy to let market, but under the current climate that's only doable if your investment isn't on credit and with a mortgage. A lot of people who have already invested in buy to let instead of mortgages could be really stuffed by the interest rates.

So there's multiple issues here.

I think that mistrust in traditional financial institutions is going to lend itself to people mistrusting even savings accounts too. Even though with high interest rates they perhaps look a lot more attractive than they have in a while.

And stuff money under the mattress isn't a good idea in a climate with no interest and high inflation rates. Not to mention much deeper levels of poverty (crime) and increasing freak weather patterns.

I do think its possible we will see a rise in more banking options based on a cooperative basis which aren't for the primary benefit of third party share holders but instead for members only. But I'm not convinced that these will give better returns - people are looking for the beat returns so they can work less

The reality we have to probably face up to is the dream of retiring at 50 has set sail and gone. People will be working even longer and will retire with less, having to put even more in even then. This was already a pattern that was playing out without this crisis.

There isn't a magic bullet here. The idea that you could have some magical low tax haven and still maintain the standard of living was the dream that brexiteers in government always had - and was out of step with the public perception and ambition for Brexit was. Thats what rankles with me. Not merely the idea of leaving the EU but what the public understood and wanted Brexit to be, being hijacked by a series of MPs who then pushed their own agenda rather than focusing on what was needed for the country.

Truss's arrogance has been almighty.

For various reasons I do think the other parties are also guilty of the same follies though, in different areas.

Politics in this country is a complete mess. No party comes close to addressing the countries long term critical issues. Its incredibly short termist and scared of big decisions.

A crash in pensions has been a long time coming imho. The final salary schemes weren't sustainable and persisted for too long in the face of this being obvious with cost to subsequent generations. Truss has probably merely speeded it up tbh.

And governments for the last 30 years have been making a variety of similarly poor decisions when biting the bullet and getting on with change would have been much more beneficial.

I don't think people really can fully protect themselves and that's the scarest bit - that loss of control and the feeling of betrayal if you have done 'all the right things'.

[StatisticallyChallenged]

@ArtHistory

So apparently the risk to pensions isn't just limited to pensions. The bigger concern is that if the pensions collapse, they will bring the banks down with them (as the banks are the one providing the collateral). If you think about how much is in pension scheme v how much was in credit default swaps, you can get an idea about what the BoE is shitting itself about - it would make the 2008/9 financial crisis look like a walk in the park.

Basically this depends on who is holding the other end of the derivative trade, and how much worse the value of the underlying assets (gilts etc) get.

Because most common interest rate derivatives have collateral/margin calls those on the other end of them should currently be ok as the pensions are currently coughing up. So the risk currently sits more with the pensions. If they go bust though them the risk transfers and if gilts keep going down then the other side (often banks, but investment rather than retail, and not only banks) is left holding the baby. If gilts then stabilise they'd be relatively ok. If they keep falling then not so much

[MarshaBradyo]

How linked is this?

When the sub prime crisis sparked 08 what exposure do other key markets have to this

pp said pensions were standing on a cliff edge and the budget was a nudge in the ribs - are they also standing in cliff edges? Usually banking is global isn’t it. We saw how quickly 08 spread

[MossCoveredTree]

@PrincessIce

When interest rates go up the value of gilts goes down. Because they are a promise to pay say 2% interest - nobody wants them when they know they can get 4% interest. So the value goes down and no one wants them.

The Bank of England stepped in and started buying th Gilts no one wants.

The movements seen in the market haven't been seen since the 1990's.

Vinniepolis has explained it better than me!

Do you work in Finance? To me that was one the most easy to understand explanations I have read thank you.

[Pinkcadillac]

What I don't understand is the logic behind DB pensions. How can they guarantee a level of return in 20-30 years time? that's impossible to achieve. If if was that easy, why don't we all have a DB pension?

It looks like the taxpayer will have to prop them up now. Will the employer and whoever manages the pension take part of the hit? together with the pension guarantee fund that someone mentioned upthread? and some help from the BoE?

[Alexandra2001]

IMF did say that Truss needs to reverse as effects here may well become global.

UK's debt default risk is now double that of France's.

Pensions were not standing on a cliff edge pre this budget, thats just a PP trying to mitigate Truss's disastrous management, no one (investors/imf/oecd/central banks) mentioned pensions previously.

This crisis is caused by borrowing to cut taxes/not raise them.

[Laiste]

Reading this thread has confirmed my suspicions that i know fuck all about finance and struggle to understand even when having it spoon fed to me! I'm trying but it's giving me a headache.

Don't know weather to laugh or cry 😭😂

God help us all.

[StatisticallyChallenged]

@Pinkcadillac

What I don't understand is the logic behind DB pensions. How can they guarantee a level of return in 20-30 years time? that's impossible to achieve. If if was that easy, why don't we all have a DB pension?

It looks like the taxpayer will have to prop them up now. Will the employer and whoever manages the pension take part of the hit? together with the pension guarantee fund that someone mentioned upthread? and some help from the BoE?

This is why most of us don't have them... when they were created the financial world was a lot simpler and people didn't live as long. So they cost much less for employers to provide.

As life expectancy increases, so does the cost of providing. As interest rates reduce, they become more expensive too (this is also tied im with regulatory requirements)
There's a good reason why most employers have long since stopped offering them, but they still have to meet the existing promises they made decades ago

[the80sweregreat]

My Dh has a final Salary pension private pension
He was one of the lucky ones as he started in the late 70s and worked for the same company for decades
The rules were changed and many are now on different terms and conditions. They probably won't receive the same as he is getting and he wasn't even one of the higher paid people either. Just one of the many minions.
Most companies are fazing them out now.
It is a pyramid scheme , but looks like it may topple. The unions did warn this might happen years ago.
Plus they were probably introduced when life expectancy was a lot lower too I would imagine
People tend to retire late 50s or 60 and could live for 20 / 30 years maybe. It's a bit of a gamble really , but all different now I believe :(

[Bunnyfuller]

Can they not sort the shortfalls by a hefty windfall tax on the energy giants? Would this help reverse the fuck up?

[ClaudineClare]

This may be a stupid question, but is it possible that by setting the Friday deadline, the BOE is playing a game of chicken with Truss and Kwarteng? The hope being that it will force them into more u-turns?

[the80sweregreat]

I've always been hopeless at maths
How the markets work and all this about gilts and bonds at is hard to get your head around too. It appears we have to trust that people know what they are doing.

[Alexandra2001]

@Pinkcadillac

What I don't understand is the logic behind DB pensions. How can they guarantee a level of return in 20-30 years time? that's impossible to achieve. If if was that easy, why don't we all have a DB pension?

It looks like the taxpayer will have to prop them up now. Will the employer and whoever manages the pension take part of the hit? together with the pension guarantee fund that someone mentioned upthread? and some help from the BoE?

Very few can have DB pensions now, its all DC or very high contributions in public services which are usually career average, no longer final salary .

Employers have to fund DB pensions and make good shortfalls, to ensure they can meet liabilities, even in lapsed pension schemes, govt backs this with a levy on pension funds, not tax payers.

Remember also that in the event of death the pension paid either stops (if no dependents or no partner) or is 50%, so the fund keeps the money.

A DC pension will stay with the estate at its full value.

btw DC and DB pension s all invest in gilts, so its not just DB schemes.

[Fenella123]

@ClaudineClare

The teacher's pension is unlikely to go bust though, as public sector pensions are funded by the taxpayer? Is that correct? I guess the government could run out of money to pay public sector pensions, but that would be even ore catastrophic.

You're right sorry, TPS is "unfunded" and backed by the government. So it's not directly part of this.

Looking around for a better example, the railways pension scheme is still around.

[the80sweregreat]

Dh had a letter saying his one was doing well , which surprised him
Not sure how , although this was last month!
My fear is it all drying up completely everywhere