BANK OR BUST
Bank of England steps in to save Brits’ pensions with dramatic intervention as fallout from mini-Budget worsens
THE Bank of England made a dramatic intervention today in a bid to save Brits' pensions, as several funds faced collapse.
It was yet another blow in the wake of last week's Mini-Budget, which sent the Pound falling, spooking financial markets and causing lenders to withdraw fixed-rate mortgages.
Without today's highly unusual move - in which the Bank bought government bonds - it's understood that several pension funds would have risked collapsed today.
If the funds had gone bust, it would have had a catastrophic effect on Brits' private pension pots.
Becky O'Connor, head of pensions and savings at Interactive Investor, said: “It’s another alarming unintended consequence of the mini-Budget.
"While it shouldn’t worry pension savers unduly, it does show how economic shockwaves can damage financial stability of many parts of the market that sit behind the financial products and services we all rely on.”
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This week's drama started when the Pound dropped to an all-time low of $1.03 against the dollar on Monday, after the mini Budget's wave of tax cuts prompted fears over government debt.
Analysts started predicting that inflation could hit a whopping 6%.
Yesterday, the following happened:
- Lenders pulled 900 mortgage deals in one day
- Families were warned mortgage bills could rise by 1,000s
- There were fears that house prices could fall by 15%
This led to a string of mortgage lenders pulling fixed-rate deals. A total of 935 products were dropped yesterday - the highest daily fall on record, according to Moneyfacts.
That was more than double the amount that disappeared on April 1 2020, at the start of the Covid pandemic.
It caused experts to warn of a mortgage ticking timebomb, as 1.8million households currently on fixed deals faced bill rises of thousands of pounds a year when it came to renewing deals next year.
In the midst of a wider cost of living crisis, experts feared many households would be unable to pay their mortgage.
Last night economists warned that this could see house prices crash by up to 15% next year.
A decline in property prices could result in the number of homes sold each year collapsing from 1.2million to just 800,000.
What did the Bank of England do today?
Today, for the first time in history, the Bank announced that it would buy government bonds on a temporary basis in a bid to stabilise financial markets.
The extraordinary intervention by the central bank took place after a huge sell-off in government bonds put pension funds at risk.
The interest payments on gilts - government bonds - has been rising over recent weeks and spiked after the Mini-Budget on Friday.
The gilt market refers to packages of long-term government debt that are traded by investors, including pension funds.
Investors were worried that the tax cuts in the mini-Budget weren't affordable and there was no plan to pay for the extra government debt.
That made borrowing more expensive, but it also caused problems for financial institutions, particularly pension funds that use gilts as part of their investment portfolio.
The danger was that the government bonds owned by pension funds were suddenly worth less than they were valued on their accounts.
So they had to put up extra funds to cover the difference. This meant that they started selling the government debt, but this pushed the debt market even lower.
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The aim of today's move by the Bank is to slow the sell-off of government debts, which was heaping pressure on pension funds.
This process is similar to quantitative easing, which took place in 2009's financial crisis and during the Covid pandemic. Its aim this time is to restore stability to financial markets.
This should help stabilise the gilt market, which is integral to the UK's financial system.
It should also give enough confidence to lenders to start reintroducing fixed rate mortgages and prevent house prices from falling.
In theory, it will help bring interest rates down and stabilise the economy.
Economists now predict that following these measures the BoE won't have to raise interest rates to 6%.
The Bank of England said: "This repricing has become more significant in the past day – and it is particularly affecting long-dated UK government debt.
"Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability."
"This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy."
The Treasury responded to the BoE by reaffirming its commitment to the Bank of England’s independence and said the Government "will continue to work closely with the Bank in support of its financial stability and inflation objectives".
A spokesperson said: "The Chancellor is committed to the Bank of England's independence."
What it means for your pension?
Anyone with a private pension is not directly affected by the Bank of England’s bond buying today.
But it has stepped in to ensure that the way pension cash is collectively invested remains stable - and isn’t affected by dramatic movements in the markets after the pound plunged.
Workers who save into a private pension should continue to save into them as normal.
As pension savings are a long term investment there is time to ride out any market falls, as they bounce back in time - for example, from the global financial crisis and the Covid pandemic.
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Some types of pension - known as defined benefit or final salary - are more invested in gilts, and so are more exposed to falling gilt prices.
The Bank of England’s bond buying is aimed at stopping them falling too far.
Helen Morrissey, pensions expert at Hargreaves Lansdown said: “The BoE’s announcement should calm the markets after a tumultuous few days that have caused chaos with news of some final salary schemes having to sell assets at short notice.
“This should settle down but final salary scheme trustees have been urged to keep the resilience of their investment strategies under close review.”
The pension regulator welcomed the Bank of England’s action and has told those running the pension schemes to make sure they are prepared to handle dramatic market movements.
Steve Cameron of Aegon said: “The Bank of England is seeking to avoid gilt yields rising further.
"This happens if the demand for gilts compared to the supply falls, meaning their prices fall and their yields rise.
"The Bank may buy gilts to keep the price from falling further and hence the yield rising further.
“Some defined benefit pension schemes have been selling gilts, increasing the supply. This won’t directly affect the pensions of members of these schemes.”
Many people in the public sector have DB pensions, which pay out an income in retirement based on your salary when finishing work.
This includes teachers, nurses, local government workers and those in the police, armed forces and firefighters.
One perk of higher gilt prices is for anyone nearing retirement and planning to buy an annuity.
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Steve Webb, former pensions minister and partner at financial firm Lane, Clark Peacock said: “The one glimmer of hope at the moment is that for people thinking of converting their pension pot into an income for life by buying an annuity, current annuity rates are some of the best we have seen for a decade.”
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