Pension funds 'would have collapsed today' if emergency measures had not been taken by the Bank of England, it has been claimed. The Bank of England was forced to step in with a £60billion buy-up of government debt to stop a mass collapse of pension funds.
The move to calm the chaos in financial markets follows turmoil for the pound and UK government bonds caused by the Chancellor’s tax-cutting mini-budget. The Bank announced it was stepping in to buy Government bonds – known as gilts – at an 'urgent pace' to try and bring the surging yields under control as they spiralled higher, sending UK public borrowing costs soaring.
It said it would buy bonds 'on whatever scale is necessary', but has so far resisted calls to deliver an emergency interest rate rise after the pound fell to an all-time record low against the US dollar on Monday.
READ MORE Judges wrong to release people accused of serious crimes from jail, court rules
The Bank announced the plans to launch the temporary programme to buy gilts, effectively stepping in to provide a backstop in the market and halt a sell-off. It made the move after the yield – or interest rate – charged on long-dated gilts soared to levels not seen for many years.
The Bank said the rise threatened to see financial conditions tighten in the UK, cutting the flow of credit to households and businesses, if not addressed. It is also understood that the Bank’s action follows concerns over the balance sheet strength of many UK pension funds caused by the gilt sell-off, sparking fears over their solvency.
Concerns over Britain’s economic policies have sparked a gilt rout, sending the yield on 10-year gilts to over 4 per cent – a level not seen since the 2008 financial crisis. Government bond yields are under pressure worldwide amid fears over a global recession caused by the energy crisis.
The Bank said in a statement: "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."
Alice Haine, personal finance analyst at DIY investing and coaching service Bestinvest, said: “The sharp fall in the value of the pound and rise in the yields on UK Government bonds in the wake of Chancellor Kwasi Kwarteng’s dramatic tax-cutting fiscal plan, set to be funded by Government borrowing, has also exposed vulnerabilities in the UK’s pension sector.
The Bank of England’s decision to step in on Wednesday “shows just how serious the problem is”, she added.
Baroness Altmann, a former pensions minister, said: “The loss of confidence in sterling following Friday’s fiscal event led to a rushed exit from UK assets, which has accelerated the rise in UK gilt yields.”
She continued: “One of the major problems for the markets was that some UK pension funds, which have hundreds of billions of pounds invested in bonds, had to sell their gilts or other assets.”
She added: “Pension funds can benefit if gilt yields rise slowly… but the speed of the increases resulted in a situation that could have spun out of control and the Bank of England has bought some time for other measures to be considered.”
Read more of today's top stories here
READ NEXT:
