Pension funds crisis forces £65bn bailout by Bank

Number 10 adamant that Chancellor Kwasi Kwarteng will not resign



Britain’s pension funds were on Wednesday at the centre of the financial crisis sparked by the mini-budget forcing the Bank of England to launch a £65 billion emergency bailout.

The Bank warned of a “material risk to UK financial stability” and stepped in to buy long-term gilts, as plunging markets for UK debt sent borrowing costs spiralling and forced pension funds to dump their assets. Economists compared the crisis to the run of withdrawals that led to the collapse of Northern Rock in the financial crisis.

However, the move by Governor Andrew Bailey helped restore some calm to markets, and pensions experts said retirement pots were not under threat. Nevertheless, worries that Mr Kwarteng’s radical mini-Budget will trigger further shocks for investors in gilts wiped billions of pounds off the stock market value of Britain’s biggest pension funds.

On Wednesday night pressure was mounting on the Chancellor to take more action to reassure markets, as Downing Street dismissed any suggestion that he will resign. Senior bankers warned Mr Kwarteng in a crisis meeting Wednesday morning that his scheduled announcement of “medium-term fiscal plan” to bring public borrowing under control was “way too far away”.

The Bank hopes to halt a domino effect in the City by temporarily suspending plans to offload £80bn of gilts held on its balance sheet. Instead for 13 days it will revert to buying them at a rate of £5bn per day using newly created money in a process known as quantitative easing.

The measures sparked a sharp rally in the market for the 30-year gilts that pension funds had been forced to sell. The cost of such borrowing fell by more than 1 percentage point, a significant downward move. Meanwhile the pound fell initially after the Bank’s announcement on fears of further inflation but recovered to finish roughly flat at nearly $1.09 against the dollar.

Pound falls sharply against dollar after Bank confirms bond-buying end date



The pound has fallen sharply against the dollar after Andrew Bailey warned the Bank of England would not extend its emergency intervention in financial markets beyond this week, after the turmoil sparked by the government’s mini-budget.

Sterling skidded by more than a cent against the dollar to below $1.10 after the Bank’s governor insisted the £65bn scheme to purchase UK government bonds would not be continued beyond the deadline on Friday.

Pensions industry leaders and one of the Bank’s former deputy governors had earlier called for an extension to mop up the ongoing bond market fallout triggered by Kwasi Kwarteng’s ill-received mini-budget last month.

The central bank had started the day by saying it would revamp the scheme’s bond-buying firepower – within the existing timeframe – for a second time in as many days, warning there were still “material risks” in government debt markets affecting UK pension funds.

However, it ended with Bailey saying the intervention must end this week, telling an event organised by the Institute of International Finance in Washington: “We have announced that we will be out by the end of this week. We think the rebalancing must be done.

“My message to the funds involved and all the firms involved managing those funds: You’ve got three days left now. You’ve got to get this done.”

It comes after the International Monetary Fund added to pressure on Liz Truss’ government to U-turn on unfunded tax cuts announced in last month’s mini-budget, saying changes in policy would help calm jittery financial markets.

Threadneedle Street said on Tuesday morning it was taking action to prevent a “fire sale” of UK government bonds – or gilts – by pension funds caught out by the sharp increase in interest rates in the past two and a half weeks.

In the final week of the scheme, it announced it would add index-linked gilts – securities where the interest rate moves up and down with inflation – to its bond-buying efforts, in an attempt to smooth over febrile conditions in bond markets.

In its single biggest daily intervention since opening the scheme two weeks ago, the central bank said it purchased more than £3.3bn of UK government debt from global investors.

Borrowing costs on long-term government debt rose on Tuesday despite the Bank’s interventions, remaining at levels close to the peak seen in the market turmoil after the mini-budget.