If we are to avoid ongoing financial crises, and pension fund damage, the Government must restore confidence
The need for temporary gilt-buying was catalysed by problems arising in UK pension funds was absolutely necessary. Despite representing an embarrassing U-turn on its recently-announced plans to sell £80billion gilts into the markets, its emergency purchases helped restore stability to UK financial markets.
In recent years, regulators encouraged pension fund gilt investments to deliver low-risk, reliable income streams which were supposed to better match future pension payments. Most pension funds used financial contracts or so-called liability-driven investment funds, that enabled them to effectively borrow money to invest in higher expected-return assets, while pledging gilts as collateral.
A sudden collapse of confidence in sterling through September, sparked a rushed exit from UK assets, pushing 30-year gilt yields above four per cent. This created specific problems for pension funds’ derivative contracts that were making massive mark-to-market losses. The day after, international investors accelerated sales or shorting of UK gilts, causing yields to crash through five per cent.
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