I had another look at why pension funds nearly went belly-up last week, and they might again after Friday this week.
Apparently it is all to do with something called Liability Driven Investments which basically is hedging to try to match pension fund liabilities with their assets. The pension funds were bullied or cajoled into doing this by their investment advisers/managers (like Legal and General) who surprise surprise charged nice juicy fees for this service and the Pensions regulator who told some pension funds off for being too cautious with taking up LDIs. Some pension funds trustees were nervous because in order to use LDIs they had to put up collateral in case the hedging went wrong; the most common security used was Government bonds because they are relatively liquid investments.
The risk is that if interest rates zoom up the value of the bond drops because its value doesn't need to be as much to generate the same income. So the value of LDI collateral zoomed down, provoking the risk of fire sales of more bonds to top up the collateral which meant the risk was of ever-diminishing asset values in the bond market; that's why the BoE stepped in as purchaser of last resort to give the pension funds time to sort out their collateral problems with these LDIs.
Naturally questions are now being asked about the role of the regulator in promoting what have turned out to be very risky investments. For quite a long time as interest rates were forced down by the BoE with quantitative easing the value of Government bonds went up and the pension funds were in the happy position of being able to in effect refund themselves large amounts of collateral. Now, partly thanks to Krazy Karting's fall from grace so far as the markets are presently concerned, interest rates have gone the other way; the immediate crisis was caused by the rapidity of the increase in HMG's borrowing costs as a result of HMG losing the confidence of the financial markets. I haven't a clue how it will all pan out.
As to the BoE having a magic money tree to buy these bonds; in the old days it was called a Gestetner but now they have a virtual version of it.
And what of the Local Government Pension Scheme? That isn't overseen by the regulator and the LGPS has made very little use of LDIs and probably has minimal exposure to them.
https://www.lse.co.uk/news/what-is-ldi- ... 94vsz.html
https://www.theguardian.com/business/20 ... -contracts
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Like the late Chaircat Midge, I am not always right.
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Furby - as I understand it if you purchase UK government bonds, you are lending the UK government money and they pay interest every year and repay the capital at the end of the term of the bond. The interest rate is fixed and they are normally seen as very low risk, long term investments which is why pension funds buy them - to balance out the volatility of the money they have invested in the stock market; however like any other loan, if the perceived risk of not getting the loan repaid increases then the value of the bonds goes down and investors demand a higher interest rate for new bonds.
In this case Krazy Karting has given away £48 biillion per year in tax cuts with no clue where that money is coming from other than by borrowing it - at a time when interest rates on the already massive UK government debt are increasing and hence government interest repayments are taking an increased share of government spending. Financial managers responsible for buying bonds clearly think this is bonkers (as does the IMF, as do I) and have deemed the UK a much greater financial risk than before the mini budget hence they have been trying to offload their government bonds before their value plunges. Their value was already falling so the BoE was forced to step in to buy them back at a relatively high price to limit the fall in their value. They did this because modern pension law requires all pension funds to have enough assets to cover their liability of paying pensions to their pensioners. Some pension funds hold a very large % of their assets in UK government bonds and the fall in their value would have been high enough for them not to be able to demonstrate that they could meet their liabilities and they could go bankrupt. It's slightly more complex than that - mainly to do with the fall in bond values reducing liquidity and forcing funds to sell off other assets cheaply to meet their immediate liabilities - but that's the simple story as I understand it.
The one bright spot in this is that the yield on bonds will rise significantly so ironically these final salary pension schemes will actually come out of this stronger as a result. The bad news is that the BoE will take a big loss on their market intervention paid for by - you guessed it - the UK tax payer. It all reminds me of when I used to watch Blackburrn Rovers and the referee made an obviously stupid and incorrect decision - thousands of people would chant in unison, "You don't know what you're doing" at him. It would be entertaining and completely justified if Krazy Karting received a similar chorus next time he walks into the House of Commons. I should add that the BoE is completely blameless in my opinion - they had absolutely no choice and if they hadn't acted there would have been a financial bloodbath for final salary pension schemes. The BoE has at least bought them some time.
In this case Krazy Karting has given away £48 biillion per year in tax cuts with no clue where that money is coming from other than by borrowing it - at a time when interest rates on the already massive UK government debt are increasing and hence government interest repayments are taking an increased share of government spending. Financial managers responsible for buying bonds clearly think this is bonkers (as does the IMF, as do I) and have deemed the UK a much greater financial risk than before the mini budget hence they have been trying to offload their government bonds before their value plunges. Their value was already falling so the BoE was forced to step in to buy them back at a relatively high price to limit the fall in their value. They did this because modern pension law requires all pension funds to have enough assets to cover their liability of paying pensions to their pensioners. Some pension funds hold a very large % of their assets in UK government bonds and the fall in their value would have been high enough for them not to be able to demonstrate that they could meet their liabilities and they could go bankrupt. It's slightly more complex than that - mainly to do with the fall in bond values reducing liquidity and forcing funds to sell off other assets cheaply to meet their immediate liabilities - but that's the simple story as I understand it.
The one bright spot in this is that the yield on bonds will rise significantly so ironically these final salary pension schemes will actually come out of this stronger as a result. The bad news is that the BoE will take a big loss on their market intervention paid for by - you guessed it - the UK tax payer. It all reminds me of when I used to watch Blackburrn Rovers and the referee made an obviously stupid and incorrect decision - thousands of people would chant in unison, "You don't know what you're doing" at him. It would be entertaining and completely justified if Krazy Karting received a similar chorus next time he walks into the House of Commons. I should add that the BoE is completely blameless in my opinion - they had absolutely no choice and if they hadn't acted there would have been a financial bloodbath for final salary pension schemes. The BoE has at least bought them some time.
Financial Crisis UK
Just read that BoE chief says "intervention must end Friday". I think he's wildly optimistic - this is going to run for a long time yet.
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I agree with WR about the BoE - I was somewhat unkind about them in an earlier post. The fact is, as WR says, the BoE probably saved the UK pensions industry the other day with their market intervention in the bond and gilts market.
The other point WR makes is about pension funds legal requirement to have assets that cover their liabilities. That is why pension funds have regular valuations to make sure that they either meet this requirement or take steps to do so. The LGPS has a valuation every 3 years; the last one was as at 31/3/2019 and the next one is being done right now. In 2019 the Hampshire part of the LGPS more or less met that obligation. However, this requirement can be changed at Prime Ministerial whim; Mrs Thatcher at one time decreed that the LGPS should cover only 75% of its obligations because she wanted to keep the poll tax down. It has taken the LGPS many years to recover from that short-term political decision.
The other point WR makes is about pension funds legal requirement to have assets that cover their liabilities. That is why pension funds have regular valuations to make sure that they either meet this requirement or take steps to do so. The LGPS has a valuation every 3 years; the last one was as at 31/3/2019 and the next one is being done right now. In 2019 the Hampshire part of the LGPS more or less met that obligation. However, this requirement can be changed at Prime Ministerial whim; Mrs Thatcher at one time decreed that the LGPS should cover only 75% of its obligations because she wanted to keep the poll tax down. It has taken the LGPS many years to recover from that short-term political decision.
Like the late Chaircat Midge, I am not always right.
Financial Crisis UK
Who pays for the failed pensions and do they have enough money. There's a guarantee scheme of some pittance of your pension even after failures isn't there.
We are not solving the problem by reduced public spending says our pm. It's almost as if they are doing the worst possible thing to make the job even more impossible than the already globally impossible isn't it. I am not a politician but even I know that you don't say yes or no and always weasel answer can't rule anything out blah blah. They must know this to have got as far as they are in politics. If reducing taxes it has to be reduced spending or more debt for at least a year or two growth takes so long to show up. If interest rates are higher (which is normal anyway last two decades are the mad ones keeping them at almost zero) they must be reaching the end of borrowing capacity mustnt they.
The campaign to make people use less energy at tea times might be happening under some other name even though the pm said no they aren't spending the 15 billion on it because we don't tell people what to do. The campaign is a trap for them though isn't it because it will be like Boris and the parties. If they say don't use washing machines 4 till 9 there would be a leak that Liz truss was found to have done the washing at 6.33pm and she and her daughters sat watching TV in their vests while pensioners died of cold.
If it's all such a mess and they are u turning anyway why don't they just put everything back to the way Boris had it and let things settle. He was got rid of for having parties and turning blind eyes to various goings on at Westminster not the policies as such. It's crazy to be going for growth while there is a war on and various othe big emergencies anyway even if it's a good idea generally in stable but poor times.
We are not solving the problem by reduced public spending says our pm. It's almost as if they are doing the worst possible thing to make the job even more impossible than the already globally impossible isn't it. I am not a politician but even I know that you don't say yes or no and always weasel answer can't rule anything out blah blah. They must know this to have got as far as they are in politics. If reducing taxes it has to be reduced spending or more debt for at least a year or two growth takes so long to show up. If interest rates are higher (which is normal anyway last two decades are the mad ones keeping them at almost zero) they must be reaching the end of borrowing capacity mustnt they.
The campaign to make people use less energy at tea times might be happening under some other name even though the pm said no they aren't spending the 15 billion on it because we don't tell people what to do. The campaign is a trap for them though isn't it because it will be like Boris and the parties. If they say don't use washing machines 4 till 9 there would be a leak that Liz truss was found to have done the washing at 6.33pm and she and her daughters sat watching TV in their vests while pensioners died of cold.
If it's all such a mess and they are u turning anyway why don't they just put everything back to the way Boris had it and let things settle. He was got rid of for having parties and turning blind eyes to various goings on at Westminster not the policies as such. It's crazy to be going for growth while there is a war on and various othe big emergencies anyway even if it's a good idea generally in stable but poor times.
Financial Crisis UK
If they say don't use washing machines 4 till 9 there would be a leak that Liz truss was found to have done the washing at 6.33pm and she and her daughters sat watching TV in their vests while pensioners died of cold.
How very true that is. "... not to be told a story, but to live inside a dream." - Hades, The Burnt City
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Well well - Krazy Karting has been sacked as Chancellor.
It rather begs the question as to why Ms Truss didn't go through the exit door with him, as the mini budget was just as much her responsibility as his. Is she really so stupid as to believe that everybody thinks this mess is nothing to do with her?
It rather begs the question as to why Ms Truss didn't go through the exit door with him, as the mini budget was just as much her responsibility as his. Is she really so stupid as to believe that everybody thinks this mess is nothing to do with her?
Like the late Chaircat Midge, I am not always right.
Financial Crisis UK
Krazy Karting! gone!
Now we have Jezza Hunt, is he any good? (hardly dare ask...)
Now we have Jezza Hunt, is he any good? (hardly dare ask...)
"... not to be told a story, but to live inside a dream." - Hades, The Burnt City
Financial Crisis UK
She's not safe yet. Could Rishi be due for a reprieve?It rather begs the question as to why Ms Truss didn't go through the exit door with him
In ancient times cats were worshipped as gods; they have not forgotten this.
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Financial Crisis UK
If Liz truss went too this week that would be very de stabilising wouldnt it. Maybe she really is thinking of the country this time. I can't see a way to get rid of her and get some one else there quickly we spent the whole summer without a pm winter will be very difficult for many reasons so can't just not have a pm. So she needs to stay until they think of a way round that one at least. A mess as it all is I think could have been worse if liz truss had stood at the podium and resigned but she really didn't seem to care answering questions they all asked similar on the theme of why are you still here prime minister so she just left.
Jeremy hunt was health secretary for years and years before Matt Hancock and the pandemic so that answers the was he any good question I think.
Jeremy hunt was health secretary for years and years before Matt Hancock and the pandemic so that answers the was he any good question I think.
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It would indeed. The Conservatives have got themselves and the country in a dreadful mess, and I can't see a way out for their party. Ms Truss has managed to lose the confidence of the markets within a few weeks of taking office and I don't know if she will be able to get that back - the hope clearly is that Jeremy Hunt will be perceived as a safe pair of hands despite his never having been a Treasury minister. It also means that Mr Hunt will have been able to write his own job description and inform Ms Truss that these are the Treasury policies and she will simply have to put up with them.If Liz truss went too this week that would be very de stabilising wouldnt it.
It's very obvious that swathes of the Tory back benches are terrified of the prospect of losing their seats next time round and want to give Ms Truss the chop. I don't think there is now a credible alternative to her, and my fear is that if the Tories change their leader again they will be seen by the markets as being incapable of providing stability to the UK and having no credibility whatsoever as a party of government. If they get to that stage it doesn't matter who their leader is.
A lady with far more political nous than Ms Truss famously declared that you can't buck the markets. I never thought I'd feel nostalgia for Mrs Thatcher; we are living in very strange and interesting times.
Like the late Chaircat Midge, I am not always right.
Financial Crisis UK
Jeremy hunt is giving the Halloween statement today. He has worked hard to mark and correct Kwasi homework in just one weekend. If it's so easy to do it all so quickly why did we have to wait until Halloween anyway and before that it was even waiting until November. And Jeremy was getting forecasts from some other important people I forget their names so that would have slowed things up a bit. The ones who always say oh no no no to brave ideas which was they weren't consulted this time round.
So it does suggest to me a wider plot because as oc commented earlier Jeremy hunt doesn't even have any treasury experience so to have it all ready in one weekend having consulted with various other financial people who luckily work weekends suggests to me it was all pre arranged behind the scenes and Jeremy has been brought in as someone who can talk in that calming way. But I suppose they might have just gone back to rishis previous balanced statement and added in the energy price cap borrowing and the national insurance because that's already in law and worked out what else could be kept if anything.
So it does suggest to me a wider plot because as oc commented earlier Jeremy hunt doesn't even have any treasury experience so to have it all ready in one weekend having consulted with various other financial people who luckily work weekends suggests to me it was all pre arranged behind the scenes and Jeremy has been brought in as someone who can talk in that calming way. But I suppose they might have just gone back to rishis previous balanced statement and added in the energy price cap borrowing and the national insurance because that's already in law and worked out what else could be kept if anything.
Financial Crisis UK
Financial statements issued in advance of being taken to Parliament?
Chances or OBR costing / analysing it?
What
Could
Go
Wrong?
Chances or OBR costing / analysing it?
What
Could
Go
Wrong?
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I read in one article that the OBR think that the taxation/revenue/borrowing 'black hole' before Mr Hunt does anything about it is £72 billion.
I had to laugh this morning at a short clip of Joe Biden; he'd just been given a large ice-cream cornet. I don't agree with a tax cut for the very wealthy quoth he and added But that is for the United Kingdom to decide - before biting a chunk out of his ice-cream and cornet.
This morning the £ is up 1 cent against the US$ and the stock market is up a little as well. I guess they are waiting for Mr Hunt's written statement later today at around 11:00, and he is giving it to the House of Commons at 15:30.
I had to laugh this morning at a short clip of Joe Biden; he'd just been given a large ice-cream cornet. I don't agree with a tax cut for the very wealthy quoth he and added But that is for the United Kingdom to decide - before biting a chunk out of his ice-cream and cornet.
This morning the £ is up 1 cent against the US$ and the stock market is up a little as well. I guess they are waiting for Mr Hunt's written statement later today at around 11:00, and he is giving it to the House of Commons at 15:30.
Like the late Chaircat Midge, I am not always right.
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I saw that clip of Joe Biden too. I got the feeling he wasn't all there.
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There must be some other crisis even more crisisey than the financial crisis going on because the prime minister has not been able to be in parliaent to answer prime minister questions because she was called away for urgent business. The financial crisis is bad enough so it's worrying there might be something else.
That's our world now isn't it. Brexit was thought dreadful disaster , then covid was an even dreadfuller disaster, then the war/energy and food bills, then this financial crisis. Whatever could be next.
That's our world now isn't it. Brexit was thought dreadful disaster , then covid was an even dreadfuller disaster, then the war/energy and food bills, then this financial crisis. Whatever could be next.
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Tomorrow's PMQs? 
In ancient times cats were worshipped as gods; they have not forgotten this.
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The woman in pink behind Penny Mordaunt looks like she has gone to sleep; presumably the almost complete reversal of the Truss/Kwarteng mini-budget (apart from the NI increase) wasn't exciting enough for her.
Like the late Chaircat Midge, I am not always right.
Financial Crisis UK
We didn't find out where Liz truss had ran off to that was more important than prime ministers questions when she is still prime minister. Prime ministers do have other things to do than explaining their choice of ministers and dealing with economic matters. Dealing with wars and meeting kings etc but why the reason had to be top secret I don't know. Even if she just wasnt up to it that day they could have arranged a reason and told us that.
Economists and people who say and write comments on economic matters despite not being economists are referring to Jeremy hunts budget. But it wasn't really a budget by him as we know it. He didnt get to pick his policies 1p on a pint 1% on or off tax etc. He was just the voice of calm reading out a plan to put everything thats not already voted in back to as it was in Boris/rishi world. Which already wasnt that great a place to be. Maybe Halloween will be a proper budget.
The anti mini budget might have calmed the markets but it hasn't calmed the people has it. Now facing likely no inflation increase on pensions and benefits and no news (because they are having a review) on who will be considered vulnerable enough to need energy next year. The energy guarantee was only contracted for 3 months so it does look to me that they never intended it to last 2 years whoever was in power. It was always mad to do two years I don't know why agreed that long because they really need to high prices to reduce demand there's no other way than power cuts. I suppose power cuts are fairer because even rich people get cut off that way but seems mad to keep allowing people unlimited gas at a subsidisied price and then be cutting electric off. Surely electric is more needed for growth or even life because without electric everything shuts down in the modern world but without gas only some businesses have to close.
Economists and people who say and write comments on economic matters despite not being economists are referring to Jeremy hunts budget. But it wasn't really a budget by him as we know it. He didnt get to pick his policies 1p on a pint 1% on or off tax etc. He was just the voice of calm reading out a plan to put everything thats not already voted in back to as it was in Boris/rishi world. Which already wasnt that great a place to be. Maybe Halloween will be a proper budget.
The anti mini budget might have calmed the markets but it hasn't calmed the people has it. Now facing likely no inflation increase on pensions and benefits and no news (because they are having a review) on who will be considered vulnerable enough to need energy next year. The energy guarantee was only contracted for 3 months so it does look to me that they never intended it to last 2 years whoever was in power. It was always mad to do two years I don't know why agreed that long because they really need to high prices to reduce demand there's no other way than power cuts. I suppose power cuts are fairer because even rich people get cut off that way but seems mad to keep allowing people unlimited gas at a subsidisied price and then be cutting electric off. Surely electric is more needed for growth or even life because without electric everything shuts down in the modern world but without gas only some businesses have to close.
Financial Crisis UK
Furbs, as you have cleverly identified, the price freeze was only contracted for 3 months yet 2 years was announced.
It seems they can’t help lying. I know there will probably be other reasons such as getting the energy companies on side who may have been unwilling to agree to something with the prices being volatile.
However, there have been so many lies.
It seems they can’t help lying. I know there will probably be other reasons such as getting the energy companies on side who may have been unwilling to agree to something with the prices being volatile.
However, there have been so many lies.