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?

@Andypandy799

From what I can tell the entire financial system is a con to allow a subsection of society to make out like bandits by stealing from the general population. They wrap their operations in a shroud of complexity so normal people cannot understand or tell they are doing this.

The key is to make your particular wheeze so big that it poses systematic risk so that the government (taxpayers) bail it out rather than let's it go to the wall. Then it becomes a big time win, because you are essentially gambling with someone else's money, with a taxpayer backed guarantee.

Two quotes for the day :

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” : Henry Ford.

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." : Von Mises.

But really understand what you are buying when you "put money into your pension". It's not a magic box, it's just a tax efficient wrapper round stocks, shares, bonds, gilts, funds investing in stuff and so on. Investments you can also buy in your ISA, or just without any tax wrapper at all.

I'm talking about DC pensions here.
(I wonder if some DB ones will offer the opportunity to buy extra years as a way to raise cash?)(probably not as that's adding later liabilities...).

Check whether AVCs offer any benefit to you over just getting yourself a SIPP. Possibly a SIPP could offer lower charges and a better range of funds to invest in, so check. Of course any offer where an employer offers to match contributions or otherwise bung extra £££ in is to be snapped up.

My old employer matched contributions into the workplace group personal (DC) pension. So I took part in that scheme, but would regularly move most of what I had in the workplace scheme over into my SIPP (which had much lower charges). The workplace scheme, I invested in the lowest volatility fund they had, as it was effectively just a staging area.

A Bank of England spokesperson said:

"As the Bank has made clear from the outset, its temporary and targeted purchases of gilts will end on 14 October. “As the Bank has made clear from the outset, its temporary and targeted purchases of gilts will end on 14 October.

The Governor confirmed this position yesterday, and it has been made absolutely clear in contact with the banks at senior levels. Beyond 14 October, a number of facilities, including the new TECRF, are in place to ease liquidity pressures on LDIs.

https://twitter.com/boepressoffice/status/1580126207492128768?s=46&t=-ZSS_OlsT7aZTQqkqx76jBg

I understand this apart from probably the most important bit - "Beyond 14
October, a number of facilities, including the new TECRF, are in place to ease liquidity pressures on LDIs."

Anyone explain what that means and hazard an educated guess as to whether this enough for things to stabilise a little?

Tbh I think saying the whole financial system is a con isn't a fair representation. Sure there's some dodgy fuckers around - Kwasi's hedge fund mates who made a packet from shorting the pound, for example. But most people involved are fundamentally decent. Your average pension fund managers are not out to rip the world off.

The problem is that in derivatives you have a bunch of products which were mostly created with good intentions and valid reasons, but which create massive systematic risk because companies are all exposes to each other in ways they wouldn't have been in the past. They create opacity about who has exposure to what, and who will ultimately be left holding the flaming turd when things go wrong.

@GasPanic funny you quote Henry Ford as he was one of the original capitalists who allegedly used the cheap labour camps run by hitler and supplied him with tanks up until America entering WW2. Have you seen the documentary 911 to JFK everything’s a rich man’s trick?

Can anyone explain in layman's terms 'Shorting the pound'.. Please ?
I know its betting on currency falls or rises and something to do with ' parity' which can make investors very rich .... But is it that which can cause destabilising failure?

The TECRF is essentially a BOE pawn shop. They'll temporarily buy assets held by financial companies, with an agreement in place for those companies to buy them back at a pre agreed price im the future. They're accepting a wider range of investments than usual which might help pensions to gain some liquidity and get things under control. Whether it is enough is impossible to say

TECRG means the Temporary Expanded Collateral Repo Facility. It's essentially liquidity support for banks on the other side of the pension fund, who are the ones who need the collateral posting to them. So it opens up the type of collateral banks can accept from pensions.

The idea that the BOE will put a brick wall up that leads to financial instability is pretty fanciful.

Their whole remit is financial stability. The idea that they will allow a crash if they can easily prevent it (say for example buying 65 billion of bonds/£2000 for every taxpayer) is fanciful.

Ultimately they will brick wall it if the markets let them, and extend it if the markets don't. They will only allow a crash if the cost to bail out becomes humongous.

This is what happened in 1992 on Black Wednesday when the pound was getting devalued.

en.m.wikipedia.org/wiki/Black_Wednesday

Its all cyclical and goes back to the Great Depression in 1929 which led to WW2

I know it’s all very depressing but think of us like worker ants or bees as that’s what we are. Once upon a time we had a caste system with serfs etc

They told us democracy was the answer! I’m not a Marxist 😂 I don’t know if any system that has ever worked as there is always people at the top

Some context on the TECRP might be helpful, post the GFC, regulation on banks ramped up enormously (as expected). So banks can only accept certain 'types' of collateral, or security relative to their day to day activities. If you think it about it, taking a 'charge' or security over a piece of land which hasn't yet got planning permission, isn't as valuable as taking security over say, a hotel which is built and fully booked 52 weeks or year. Even better security than that, would be a portfolio of corporate bonds of a FTSE 100 company, and so it goes on up the chain.

Banks are very strictly regulated on how much of each 'type' of security it holds, relative to how much lending it has for personal mortgages, loans to small businesses, loans to big business etc. What this is doing, is easing very slightly, the type of collateral or security banks can take to support LDI schemes.

@Laska2Meryls in laymens it’s like gambling.

Short-selling allows investors to profit from stocks or other securities when they go down in value. In order to sell short, an investor has to borrow the stock or security through their brokerage company from someone who owns it. The investor then sells the stock, retaining the cash proceeds.

The short-seller hopes that the price will fall over time, providing an opportunity to buy back the stock at a lower price than the original sale price. Any money left over after buying back the stock is profit to the short-seller.

As an example, let's say that you decide that Company XYZ, which trades for $100 per share, is overpriced. So, you decide to short the stock by borrowing 10 shares from your brokerage and selling them for a total of $1,000. If the stock proceeds to go down to $90, you can buy those shares back for $900, return them to your broker, and keep the $100 profit.

It happened recently to an American company called Game Stop

Shorting is basically betting against the value of something, and there's lots of ways to do it.

Let's say you believe the share price of company X is going to fall. You borrow shares in X from someone who owns them, committing to return them in 10 days. You then sell the shares at £1.25 each. The shares then collapse and you buy them back at £1 each, and give them back to the owner. They've still got their shares. You've just made a nice wedge of cash by betting they'd go down. And because you borrowed the shares you probably didn't ever pay out the £1.25 in the first place.

Course if you got it wrong and they went up to £1.50 you'd have to spend more to buy them back and you'd make a loss.

If enough people bet that the share price would fall and did this it would effectively become a self fulfilling prophecy as you'd have lots of shares for sale which would drive the price down.

Currency speculation is a bit more complicated and often involves derivatives but the concept is similar - lots of people bet the pound was going to collapse and cleaned up when it did.

I have just read that these LDI funds are typically based abroad. Does this limit the scope of what the govt and BoE can do?

Ah I see @StatisticallyChallenged and @Andypandy799 . So the original owner has nothing to lose ( if they are investigating for a long bet)... But it's not actually borrowing though ? They have to actually sell to the 'gambler' and rebuy from them?

The gambler in the middle sells them, but they only borrowed them from the original owner. The original owner still considers themself to be the owner and to be exposed to the price movement- they can't refuse to take them back

Are stakeholder pensions 'defined contribution' pensions?

I'm so confused and quite worried.

I have more than 25 years before I can retire. Should I just start putting my money in an ISA?

ARGH.

This will probably already have been answered but I started working in the chemical industry in the early 2000s and as a result I have two years of defined benefit pension (they shut the scheme and put us on defined contribution for subsequent years).
I don't know how common DB still is in state pensions but I do know that the Bank of England itself still has a defined benefit scheme and that it's fully funded by gilts (none of this leveraged stuff, I guess if for no other reason, because they can't be seen to be benefiting from the huge amount of market sensitive information they have access to!)

Thanks to those who provided explanation & context re: TECRF.

The gambler, the person "shorting the shares", borrows them.
The party they borrow from takes the risk that the borrower will go bust and not pay them back, though. So the gambler pays them some money; effectively the gambler is renting the shares. Or bonds, or gilts, or currency.
Gambler says to gilt owner, I'll swap you £X for £Y of (say gilts) today and swap it back on date Z and pay you £A for your trouble.
Gambler then flogs the gilts for £Y or thereabouts, and on date Z finds (hopefully!) he can buy that many gilts (to give back as per the contract) for £Y-Q
Hurrah, the original gilt owner gets £A, the gambler gets £Q, the gambler has successfully "shorted" the gilts.
The "short" comes from "being short on" - the gambler needs, at the end of the deal, to have the assets to swap back, but, as he sold them already he is short of the assets. But that's ok providing he can buy enough at the last minute (at a lower price than he sold them for earlier).

Seconded. Lots of useful info here, many thanks!

Thanks.. that's answered my next q , which was 'whats in it for the original owner?'. And I thought must be that..
Im surprised though that its even legal , but hey ho....
I was obviously in the wrong business! ,( Now on a DB pension, but retired early)

So keeping all fingers crossed...

The original owner either doesn't think the price will drop, so is happy to lend, or isn't too bothered by the fluctuation as they're holding for the long term. So they make some extra income from lending the shares or other assets out.

If it's any comfort I'd expect priority for any funds (in the event of catastrophic failure) to be existing pensioners, then maybe a sliding scale depending on how close you are to retirement. The longer people have to go, the greater their ability to "make up" any loss