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What is the impact of the UK financial crisis on pensions?
Illustrations by Eva Bee/Ikon Images
As the Bank of England (BoE) rushed yesterday (September 28) to calm the market with a surprising quantitative easing (QE) or bond purchase, rumors spread on social media that the move was triggered by a pension fund.
This theory makes sense that pension funds are, after all, holders of government debt. Pension funds, which have been depreciating after Friday’s disastrous mini-budget, are more worrisome as economists claim they are struggling to meet margin calls. A brief explanation of what today’s move means for your superannuation.
What is a margin call?
The largest UK pension funds each manage tens of billions of pounds and they don’t buy their investments in a stable way, but also other products that help them manage the risk that their investment’s value will change. Because instruments are often leveraged (payment for debt usage), the fund can take more risk with less money. However, debt also poses a risk to banks and other financial institutions if the value of an investment changes rapidly and significantly (for example, in response to the government’s biggest tax cuts in half a century with inflation of 9.9%). Institutions that issue margin calls: Ask to increase the amount payable to the annuity fund or the margin on the account. At least three UK pension funds were reported to have been hit by margin calls of up to 100 million on Tuesday night.
Why did the Bank of England react that way?
For pension funds, this situation represents a liquidity problem. To get the cash needed to satisfy a margin call of this size, many people have to sell their assets and one of their holdings. Long-term government bonds (gold). However, their prices have already been low and volatile, and the sale of large investors such as pension funds will push their prices further down.
The announcement by the Bank of England specifically addressed long-term UK government debt and nodded to pension funds when it warned that a continued or worsening dysfunction in this market would pose a significant risk to UK financial stability. Bank officials report that they are concerned that they are witnessing early stages of a dynamic implementation, the scenario that led to the collapse of Northern Rock in 2008. Banks’ solution was to intervene in long-term sow purchases that they hoped to stabilize. Prices.
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These moves appear to have worked. Yields on 30-year gold (opposite to price) were down nearly 100bps by mid-afternoon, while 10-year yields were down 50bps. This puts the Bank of England in the unique position of an inflationary move known as a slack to increase interest rates and buy bonds on the other hand, known as tightening monetary policy.
Partner content How secure is my pension?
Even a 100 million margin call is not an existential threat to large pension funds, and if the fund becomes insolvent, it is protected by the Financial Services Compensation System (FSCS) up to KRW 85,000 per person per institution. , should be financed by much higher government borrowing, such as in 2008 when the Bank of England provided a loan to the FSCS to help Bradford & Bingley clients.
If you’re on a final paycheck and the company you work for goes out of business, your pension goes into the Pension Protection Fund. In this case, if you are over the state pension age, you will receive a full pension (90% if under).
The bad news is that people nearing retirement are more likely to be affected by this week’s events. That’s because investors tend to move these people’s money to lower-risk assets like long-term government bonds as they get closer to retirement. . So while pension funds pose little risk, national pension pots may look a little lighter for the time being.
Helen Morrissey, chief pension and retirement analyst at Hargreaves Lansdown, points out that pensions are long-term investments and will sometimes be subject to significant stress. With a few years left before retirement, the market will have time to recover. Making an erratic reaction, such as changing your investment strategy, increases your chances of averting a loss and makes recovery more difficult.
[See also: The Bank of England is right to hold its nerve]
Sources 2/ https://www.newstatesman.com/business/finance/2022/09/uk-financial-crisis-pension-safe-risk The mention sources can contact us to remove/changing this article |
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