Brits have been left concerned for their pensions after the Bank of England confirmed that its bond-buying programme would end this week.
The Bank was forced to intervene to help pension funds after financial markets were plunged into turmoil, as the pound slumped to a record low and bond prices fell following Chancellor Kwasi Kwarteng’s mini-budget last month. Emergency measures brought in by the Bank, in which they bought bonds to help stabilise their price, are due to end on Friday - despite calls to extend the scheme.
Speaking on Tuesday, Bank of England governor Andrew Bailey warned pension fund managers that they have “three days left” to balance their books, The Mirror reports . The Bank emphasised that the help would not be extended, “as it had made clear from the outset” - but what does this mean for pensions?
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To explain a bit more about the current situation and why the Bank of England stepped in: ‘bonds’ are effectively loans or ‘IOUs’ issued by Governments and businesses that are paid back over a set period of time, plus interest. ‘Gilt’ is another term you may have seen in the news, which is the name given to bonds issued by the Government.
The Bank of England announced on 28 September that it would buy 20 and 30-year gilts, to reassure pension funds that there would be a buyer if they needed to sell off bonds. The measure was also aimed at bringing down gilt yields.
Defined Benefit (DB) pension funds, which promise to pay an income from a set age, normally invest in long-dated bonds. But since the mini-budget was announced, the price of bonds has fallen - when this happens, yields rise.
The yield is the interest rate that an investor earns on an investment, and higher yields mean that bond investors are owed larger interest payments. When the price of bonds dropped after the mini-budget, pension funds operating so-called “Liability Driven Investment” strategies were forced to start selling bonds off to try and raise money.
Many will be asking the question: Is my pension safe? The short answer is that yes, your pension is safe if your pension fund goes bust – however, you may not get all of your money back, depending on the type of pension you have.
For most private or workplace pensions, the Financial Services Compensation Scheme (FSCS) guarantees 100% of your pension if a fund goes bust. Most workplace pensions are Defined Contribution (DC) schemes - a pension pot based on how much is paid in.
If your DC pension provider was authorised by the Financial Conduct Authority and cannot pay you, you can get compensation from FSCS. But if you have a self-invested personal pension, or SIPP, that falls to up to £85,000 per person.
If you are in a DC pension scheme and invested in a diverse range of assets around the world, the current crisis should have a limited impact, according to Tom Selby, head of retirement policy at AJ Bell.
“While your fund will rise and fall, particularly over the short-term, keep in mind that a DC pension is a long-term investment,” he said. “Provided your pension investments are diversified, what is happening in UK bond markets shouldn’t be a big cause of concern.
“The issues hitting Liability Driven Investments relate to DB (Defined Benefit) pensions. The key thing to remember with a DB pension is that it is the strength of the employer that matters, rather than the performance of investments held by the pension.”
If you’re a member of a Defined Benefit scheme - a pension based on your salary and how long you've worked for your employer - your pension should still be paid in full, as long as your employer doesn't go bust. It is ultimately down to your employer to make up any shortfall in your pension.
If the company you work for does go under, you should still receive a substantial amount through the Pension Protection Fund. The PPF will compensate you for 100% of your pension if you've already reached the scheme's retirement age - or 90% if you haven't reached retirement age.
The state pension is not affected.
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