A Major Bank Said It Almost Lost All Of Its Pension Funds

The Bank of England is saying they came very close to losing their pension funds for retirees.

By Gabriella Acuna | Published

bank of england

Pension funds in the U.K. narrowly avoided total collapse last week when The Bank of England’s Financial Policy Committee stepped in to help. On Sept. 23, the new U.K. government announced fiscal policy changes that drove a large sell-off of gilts, which are U.K. government bonds. The bank provided “a two-week purchase program for long-dated bonds,” reported CNBC.

The Bank of England also decided on a delay of its own gilt sales. As bond values dropped, Britain’s long-dated gilts seemed to take the brunt of the impact. Two-thirds of Britain’s $1.69 trillion in liability-driven investment funds consists of long-dated gilts. 

Panic began to take over as markets continued to grow unstable, sparking concern from The Bank of England. LDI fund managers warned The Bank of England that many liability-driven investment funds, which are owned by a variety of pension plans in the U.K., were probably going to fall into the negatives. Because many banks lent their money to LDI funds, gilts now held as collateral by those banks would have been sold on the market, causing extreme financial chaos.

The long-driven investment funds needed to sell off most of their long-term gilt positions when the value dropped last week. However, gilt prices were about to start spiraling downwards quicker than expected. The Bank of England’s Deputy Governor Jon Cunliff said that the event would cause “widespread financial instability,” according to CNBC

The consequences of the LDI funds falling into the negatives would have been steep for U.K. citizens. Those who were up soon for retirement would have lost the income they had been planning to rely on, as the pension plans provided annual income that was based on the retiree’s average salary. The adverse series of potential events helped spur The Bank of England into action as it began to come up with a plan.   

The U.K. pension plans at risk were supposed to support retirees for the rest of their lives, and the plans affected included final salary pension plans and workplace pensions. Workers in the U.K. could have found themselves without the retirement income they had worked and saved up for their entire lives. The severity of the situation resulted in the Bank of England and U.K. Treasury trying to quickly come up with an effective solution. 

“On Sept. 27, 30-year gilt yields rose by 67 basis points from their position that morning,” reported CNBC, as financial experts warned that a massive selloff was likely to occur that would cause LDIs to become negative. In order to avoid a financial collapse, The Bank of England stepped in, diligently working overnight to figure out how to prevent a total meltdown. By the next morning, both the bank and the U.K. Treasury had come to an agreement. 

As The Bank of England worked closely with the U.K. Treasury, a plan was formulated that would ensure the market remained stable. On Sept. 28, the 30-year gilt dropped by more than 100 basis points, just after the bank announced their rescue plan. The increase in gilt yields was astonishing, as it rose more than double the largest number it had risen since 2000.