A pile of commentators have appeared on this blog over the last day or so telling me that the interventions by the Bank of England in financial markets are in no way related to pension funds and do not benefit them. Many have been deleted for their tone. A few I have posted to make clear just how wrong they are.
Why are they wrong? Because they look at what the Bank is doing by buying gilts through a QE process and say that this does not directly help the funds. It does instead provide liquidity to conventional (and now index-linked) gilt markets. So, they claim that pension funds do not get direct help.
Why do I disagree with them? Because the crisis has been caused by illiquidity in markets caused by gilt sales by pension funds desperate to sell assets to cover calls for collateral cover.
What is the aim of the intervention? It is to take away the need for those urgent sales by funds at what are likely to be undervaluations.
Do the pension funds benefit as a result? Of course, they do. But it's not direct, and so those criticising me say I have got it all wrong.
So what is going on here? That's easy to explain. Those who are criticising are looking at what is happening as economists do. They see market interventions as a result of which pension funds need not sell so they say pension funds are not involved. As a political economist, I ask why the intervention is happening, which is so that the pension fund may either not sell, or may do so in an orderly fashion with smaller losses, and so, of course, the pension fund gains.
Which approach is more useful? That is the political economist, of course, because they answer the real questions in life.
And how do I know I am right? The Bank of England says so. Take these comments from the Bank of England issued this morning as they extend this emergency programme as evidence:
LDI activity is essentially only by pension funds.
Those seeking to make similar comments again today will be deleted.
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Put that in your pipe and smoke it all you snake oil detractors!!
Ha!
The problem as I see it is that selling under duress is so normalised in financial markets these days. To call those profiteering /extracting from it hyaenas, is an insult to hyaenas.
I am curious, I found this today
https://www.professionalpensions.com/news/4057113/updated-bank-england-announces-gilt-market-operation?utm_source=taboola&utm_medium=referral&utm_source=taboola&utm_medium=referral#tblciGiDBZjZ6L9tiYQjwlRSnj1ifo5vgZrJBxCUQAaTQpRPxyyDWjT0opPbQhfzV2YxU
They give this quote about the BoE;
“It noted that, in particular, it would not offer to purchase gilts newly issued by the UK Debt Management Office (DMO) within one week of their issue; and would not offer to purchase gilts which the DMO has announced it will re-open, including via a mini-tender, during the one week before and after re-opening. ”
How close to overt government funding is this? A week does not sound a long time in the scheme of things, I am not an expert here but is this really secondary market operation or is it more or less buying new government debt, ala primary market?
It is overt government funding in all but name
The Bank of England is acknowledging again that its gilt purchases (ie QE) is fully indemnified by HM Treasury. The Bank’s asset purchase subsidiary is just a nominee for the government. In effect these repurchased gilts are cancelled. (A company buying back its bonds at a discount would have to worry about the loan relationship rules that tax a “deemed release” of the discount.)
And the Bank is acknowledging that there is a market failure: “restore market functioning … Dysfunction … self-reinforcing ‘fire sale’ dynamics … material risk to UK financial stability … excess of market intermediation capacity”
This suggests things are far worse than we might have suspect. Is the financial system at risk of collapse?
Yes
You won’t engage in discussion because either you do not understand the situation or your sole aim is not to represent the facts but to use it as political capital. The pension funds selling gilts are well capitalised and are not being “bailed out” as you say. They do not need funding. The Bank of England through QE are putting down a market where they want long term interest rates to be. That is their motivation for their involvement. This is very different to what you infer.
That is not what they say – as I note this morning
So you are wrong
Don’t waste my time with misinformation again
Or alternatively explain why the Bank are lying about what they are doing and why, if you can
NOTE FROM EDITOR
This comment has been deleted
It would seem that this is about the fifteenth identity used by this person here – all trolling
My understanding is that pension funds needed cash to pay for margin calls demanded by liability-driven investment. https://www.risk.net/derivatives/7954682/uk-pensions-hit-with-ps100m-margin-calls-as-gilts-and-sterling-slide
They were stuck with Gilts that no one wanted and so couldn’t sell them. The Bank of England then stepped in using QE and bought the gilts.
Am I wrong?
No
You are right
So, they were bailed out due to their illiquidity that threatened their solvency
That is very clearly what is agreed to have happened
The bail uit happened by the Bank becoming the butter of gilts, if required. You need a tortured mind to suggest that is. not a bail out
I think the September 28th intervention was, as the BoE said, to maintain an orderly market. Conditions were extreme and if your gilt repo market seizes up as certain key players can’t pledge collateral then they need to act and act fast (before 3pm that day). At that point, very few people outside a few traders were aware of the reason for the collapse in gilt prices but the need to act was clear. Once the BoE stepped in they needed to buy very little in order to stabilise things. Gilt prices (as represented by futures) had collapsed from 104 to 91 as a result of the mini-budget, the BoE intervention took us immediately back up to 97 and then more gently back to 100. Since then it has declined all the way to 92 again… which has prompted the latest intervention.
This is NOT now a disorderly market, we all are “experts” in LDI, gilt prices reflect the “combined wisdom” of the market… and it is not looking good for gilts as the market faces massive supply. It is hard to accept the claim that this intervention is about maintenance of order – it is more a reluctance to accept the market’s message about gilts.
In some sense, I am pleased that the BoE is targeting yield levels; it makes much more sense than just announcing volumes to buy (or sell) without regard to price…. I just wish they had done this a year ago to prevent long gilt yields getting pushed to absurdly low rates – which is one (there are others) of the root causes for the current debacle.
Finally, should people with Defined Benefit pensions be worried? I am afraid the answer is yes. If the assets are badly managed the pressure will come in one way or another; increased employee contributions, reduced benefits, increased contributions by companies, scheme closures or government bailout.
What if you have already got your pension, Clive? What happens then?
First, hope that the company that provides it does not go bust. If it does then it will be taken over by the PPF which will honour the contract but with an upper limit (£40k ish, I think?).
Second, if things get really ugly for the sector as a whole and they are deciding where the pain should get taken then I suspect that existing pensioners will take a hit, too. Perhaps not uprating inline with inflation or similar but by and large, existing pensioners are unlikely to be badly hit because they have few options to respond.
To be honest, I do not think this is a huge risk… but it is still a risk. I could not possibly give you financial advice….. but my general advice (for what it’s worth) would be not to worry unduly; stress and anxiety over this issue is likely to be far more damaging than the possible financial outcomes.
Thanks, Clive.
Clive interesting stuff, you and Richard have simplified some confusing Comments here I couldn’t follow.
BTW, is the £40k limit a p.a. pension or total pot? The latter would be calamitous.
Somebody needs to tell the economists and economics commentators in the press. One commentator interviewed this morning on BBC Radio Scotland GMS, presumably as an economics expert, was repeating yet again the idea that the balance sheets of the pension funds were fine, and if I understood her vague case, that is the decisive matter; the liquidity issue is fundamentally a short-term, passing problem. Even the interviewer confessed at the end he wasn’t entirely reassured.
My head was not in my hands, only because I now take for granted that an economics education (which is what I presume propels these loose opinions into our homes) is serously deficient.
Who cares about the balance sheet when the cash flow is knackered and the bills can’t be paid?
The trouble with commentators who have never been out at the blunt end in the world is that they really don’t know what they are talking about
I hope my pension provider hasn’t gone bust, but my financial adviser has gone into voluntary liquidation. He then asked me if I wanted to join a different group that he had set up. What? Is that even legal?
All this talk about pension funds should not be bailed out makes me feel really worried. Nothing I can do about it now, in my 70s.
Starmer has just told his senior staff that the Truss government could fall at any time and to be ready for a general election. Couldn’t come too soon for me.
In which case Starmer will be very friendly tomorrow at PMQs. Assuming there is one, of course.
My God, me too. Has there ever been a more incompetent, destructive government than this? Led by the worst PM and chancellor in UK history!
Truss and Kamikaze, in a few weeks, have made Johnson and Sunak look competent. I wonder if the Truss supporting morons (definitely not too strong a word) in the tory party membership have worked out that their pensions are now being put at risk by the ludicrous clown they voted in as a PM?
The Pension Protection fund is doing lots of LDI so I guess we are now in the situation where the BoE is now desperately bailing out the lifeboat. Eeek!
Since Andrew Bailiey threatened the pension schemes and told them to get it sorted by Friday, I have a vision of all those 1/3 of Member Nominated (staff/pensioner) Trustees to be doing a Superman / Wonder-woman impressions. AB obviously doesn’t understand that these people attend meetings once a month at the most and often struggle to get their employer to release them from their normal job.
There are no modules in the Pension Regulator’s Trustee Toolkit training course explaining what to do in the event of a couple of Lunatics attempting to destroy the economy.
Excellent point
Can someone explain what LDI funds are and why they are generating large margin calls?
Sorry – not time, but search them in the comments on the blog river the last few days and Clive Parry has provided good explanations
Sorry – no time, but search them in the comments in the blog over the last few days and Clive Paeryy has provided good explanation – well, as good as you will get
I must admit that I’m somewhat puzzled by the reluctance of the BoE to call what they are doing QE. There’s a fair bit of disagreement over economists as to what QE actually is. Some say its just an asset swap which it is in the narrowest of meanings. Some would say it’s a way of increasing aggregate demand as Frances Coppola said in a recent tweet. This is true if you include the wider context of government also selling bonds into the market at the same time as the BoE is buying them and so getting a higher price than they otherwise would. She says the BoE is doing Open Market Operations (OMO)
What is beyond doubt is that QE reduces interest rates. This is why they have been ultra low until recently. OMO has exactly the same effect of lowering longer term interest rates due to BoE purchases, so whether you want to call it OMO or QE is a moot point.
I read that the BoE has put its decision to introduce QT on hold. So I guess it’s saying something like “we aren’t going to go for Quantitative Tightening as this stage but we aren’t going to call it Quantitative Easing either! ”
So it’s going to be Quantitative Just the Same maybe ?
Does the Bank of England bailing out pension funds suggest that private pensions do not work?
To some degree that has to be the case
All I seem to hear is the word “markets”. It is as if the community and their desperate plight is of secondary importance. They don’t have a say in how the country is run . Nor do their representatives in Parliament. What is being revealed is the extraordinary power exercised by the financial sector over governments. In June 1944 the Labour Party NEC stated – “Finance must be the servant,and the intelligent servant of the community and productive industry: not their stupid master.” This statement is as relevant today as it was then. Is there a chance the bankers and the financial sector can be brought under democratic control.?
You do realise that it was the government policy that caused the current issue?
[…] By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK […]