As the clock ticks towards 5pm on Friday 14th October, the bells of St Pauls are beginning to toll the end of the week. With is is the end of the Bank of England’s support for conventional and index linked gilts. Pensions are on their own again and the 30 year bond is yielding just under 4.9%.
The chances of Liz Truss limping on look very unlikely, she has not impressed anyone but the Tory die-hards, 80,000 of whom in her an answer to deep rooted prejudice that Britain isn’t working.
She has sacked her Chancellor but seems to be blaming everyone else but herself for his demise. She is blaming the markets , though only Britain has seen its markets tank.
She has appointed a caretaker Chancellor who looks a caretaker Prime Minister in waiting.
Meanwhile pension schemes are scraping the barrel to find collateral to maintain hedges around which their strategies are built. The growth assets on which we hoped to build back Britain are being sold – often at deep discounts while the Bank of England has held out its aprons and bought back gilts at a fraction of the price they traded at a year ago.
What has been done to redeem the situation created by a moronic micro-budget has been piecemeal and inadequate
31 October, the OBR forecasts, and a clear statement of policy from the new chancellor can’t come soon enough.
Piecemeal changes to individual tax policies won’t cut it when it comes to restoring the credibility that has been lost over the last few weeks.
— Paul Johnson (@PJTheEconomist) October 14, 2022
The pension schemes have every right to be furious that they have been hung out to dry by the incompetence of politicians, but their lack of stress testing is being exposed. If pension funds had been banks, would they have let themselves be exposed to the risks that were realised in the past three weeks?
What will next week bring? Pension schemes are right to be fearful. We have a long wait till October 31st with no certainty that the Hunt and Truss can find an acceptable solution to the OBR. Their room to manoeuvre, curtailed by recent borrowing over the pandemic is further restricted by current calls on finances as Government borrowing rates increase.
Ordinary people, including the vast majority of the people who sat in sessions of last week’s PLSA conference are fearful. Pensioners are seeing their income eroded by inflation, mortgage payers are seeing further calls on their income running into hundreds of pounds a month. Savers are seeing their “risk free assets” slashed in value while those who live or travel abroad find their pounds are worth no more than dollars and euros
Worst hit of all are those who struggled to get by in the good times but who now face winter with little money and little hope
It is hard to find a crumb of comfort for Liz Truss as she enters this weekend. But harder still for ordinary folk. Waiting lists are at all time highs , power cuts are likely and the only promise the poor have that their benefits will not be frozen are from a woman who no one relies on to be consistent from one day to the next.
It has been a long week – it will be a long winter.
You do not mention the Regulator? Or have you accepted their line that there is no problem with LDI and pension schemes, other than their advice for schemes to provide a legal Power of Attorney to permit LDI managers to confiscate scheme assets?
The problems in the DB pensions market may have been triggered by the economically illiterate budget but it was the utter folly of LDI which turned that into a gilt market crisis. Had that not been present, it is likely that we would have seen a drop of 2.5% in conventional prices (15 year) on mini-budget day and something a little lower than the 3% fall on the following day, but we would not have seen the 4.8% and 4.6% declines of crisis Monday and Tuesday, and not have needed to have the Bank intervene. The Pensions Regulator has much to answer for.
I am happy to agree with Con and you that the Regulator is a part of the problem and is continuing to pretend that there is nothing to worry about. This is not how I see it, nor how the schemes I know who have been having to find collateral see it.