London Daily

Focus on the big picture.

Why we should all be worried about the crisis at UK pension funds

Why we should all be worried about the crisis at UK pension funds

Volatility has hit the British economy following Prime Minister Liz Truss’ mini-budget announcement.

Britain's mini-financial crisis of recent weeks may look like a problem mainly for U.K. traders and the government of Prime Minister Liz Truss.

But on closer inspection, the situation carries the seeds of a much wider financial reckoning, revealing major vulnerabilities in the so-called shadow banking sector that controls trillions in assets globally.

Comprising non-banks like insurers, investment firms and pension funds, the shadow banking system isn't subject to the same rules as traditional banks, particularly when it comes to requirements to hold cash against market shocks.

Yet those non-banks face growing financial strains amid rocketing inflation, raising the possibility of further bailouts and central bank interventions. To stave off a global crisis, a growing number of officials and economists say regulation is urgently needed.

“If you don't have that view of non-bank finance and the system as a whole, then these things sort of bubble. And they happen very slowly, but when they then go wrong and go the other way, it can happen very fast and that’s what we’ve seen just now," said Iain Clacher, professor of pensions and finance at Leeds University.

Alarm bells are already ringing in the EU and elsewhere as rising rates, soaring inflation and sky-high energy prices stemming from Russia’s war in Ukraine create strains on the financial system. As the world exits a period of record-low interest rates, the U.K. blowup may be a sign of more mini-crises to come.

“It may be more common that we're in this world where central banks are raising rates and also intervening in financial markets to sort of keep them glued together,” said Steven Kelly, senior research associate at Yale University’s program on financial stability.


UK blowup


The crisis that saw the pound drop to record lows against the dollar started when Truss' government unveiled a mini-budget that spooked investors and sparked a major sell-off in the bond market.

U.K. pension funds, which hold around £1 trillion in assets, became stuck in a “doom loop,” where they had to sell more government bonds, known as gilts, to meet cash calls on leveraged bets.

Those sales in turn pushed the price down further.

It was only when the Bank of England stepped by pledging to buy up to £65 billion of gilts until October 14 that the "doom loop" stopped and pension funds gained time to meet cash calls and stop the contagion from spreading.

Having focused too much on the individual health of each pension fund rather than the health of the system as a whole, regulators were blindsided.

"When you take a more discreet view that pensions is regulated here, insurance is regulated here, banking is regulated here, things are missed," added Clacher, a long-term critic of the liability-driven investment strategies that plunged U.K. funds into difficulties.

Plus, he said, low interest rates became a dogma: "It feels to me that there was sort of a belief that interest rates could never really go back up sufficiently or if they did, they wouldn’t go up as quickly as they have. And that lack of challenge to that belief set has got us to where we are."


Global lessons


That's potentially a worldwide problem, particularly as so-called non-banks — including investment funds, pension funds and insurers — have ballooned in size since the financial crisis and in some cases have taken on risks that once sat on bank balance sheets.

The International Monetary Fund said this week that the assets in open-ended investment funds have quadrupled since 2008 and now stand at $41 trillion.

While banks have been forced to build up huge reserves and are now much safer, non-banks don’t have the same ability to swallow losses, particularly in a short-term crunch.

The Financial Stability Board, which is leading global efforts to come up with some kind of regulatory framework, labeled so-called non-banks — including money market funds and open-ended property funds — as villains in the March 2020 “dash for cash” at the start of the pandemic, which also required a massive intervention by the Federal Reserve.

Plus, the FSB’s chair, Dutch central banker Klaas Knot, warned earlier this year of hidden leverage and liquidity mismatches at non-banks — all factors at play in the stress at U.K. pension funds.

Jon Cunliffe, deputy governor of the Bank of England, wrote in a letter to MPs on Thursday that the pension-fund crisis “underlines the necessity” of international regulation of non-banks.

“It is important that we ensure that non-banks, particularly those that use leverage, are resilient to shocks,” he wrote.

“While it might not be reasonable to expect market participants to insure against all extreme market outcomes, it is important that lessons are learned and appropriate levels of resilience ensured,” he added.

A similar issue is at play in the EU debate over the huge cash calls putting pressure on gas and power companies hedging electricity prices in volatile financial markets.


'Safe' assets


Yet perhaps the biggest problem for the financial system was not so much the direct trouble at pension funds but the turbulence caused in government borrowing markets.

It was dysfunction in that market and the potential spillover to the real economy that ultimately prompted the BoE to act to protect the U.K. financial system.

“You could have a pension fund blow up and the financial system keeps working,” said Kelly from Yale University. “It was really about the gilt market.”

Post-crisis regulations have pushed banks, insurers and pension funds to invest more in “safe assets” like government bonds — but those assets aren't immune to a sell-off.

Sharon Bowles, a member of the U.K. House of Lords and a former chair of the European Parliament’s economics committee, criticized “group think” on the safety provided by sovereign bonds and argued pension funds and insurers' investments are not diversified enough. (She also described U.K. pension funds’ use of bonds to collateralize other bond holdings as “unbelievable” and “like a Ponzi scheme.”)

“Things invented to offer safety at an individual level break down when called on in quantity,” Bowles, also a member of the private sector Systemic Risk Council, said in an email. “Thus when there are big events, herd behaviour happens and we get the opposite of the promised stability.”

For Kelly, central banks may well be on the hook for the next blowup — but buying up bonds is easier than recapitalizing banks.

“We've sort of traded in some risk of financial crises for a higher risk of market type instability moments,” he said. “We may not have bank runs, but we have weird blowups of commodity dealers and pension funds.”

Newsletter

Related Articles

London Daily
0:00
0:00
Close
Unelected PM of the UK holds an emergency meeting because a candidate got voted in… which he says is a threat to democracy…
You Are So Beautiful
Rob Schneider explains California reparations legislation.
Postmodern Jukebox European Tour Version
Who knew badminton could get so intense?
An old French tune (by Georges Brassens) Pomplamoose ft. John Schroeder
Farmers break through police barriers in Brussels.
Sattahip Motor Show 20
London's Iconic British Telecom Tower Sold To Become Hotel
SONATE AU CLAIR DE LUNE - Moonlight sonata
Ukraine Arrests Father-Son Duo In Lockbit Cybercrime Bust
A kiss to build a dream on
US Offers $15 Million For Info On Leaders Of Cybercrime Group Lockbit
Wonderful Tonight - Eric Clapton (Boyce Avenue acoustic cover)
Russia Claims UK Cultural Agency Spied for Ukraine
Mean Blues
Apple warns against drying iPhones with rice
La Chansonnette
Alexei Navalny: UK sanctions Russian prison chiefs after activist's death
Pattaya Addicts
German economy is in 'troubled waters' - ministry
Franz Liszt - Liebestraum - Love Dream
In a recent High Court hearing, the U.S. argued that Julian Assange endangered lives by releasing classified information.
Dream a little dream of me
New video
Unchained Melody sung like you've NEVER heard!
Tucker Carlson says Boris Johnson wants "a million dollars, in Bitcoin or cash, from Tucker Carlson to talk about Ukraine.
Dave Brubeck - Take Five
Russia is rebuilding capacity to destabilize European countries, new UK report warns
Édith Piaf - Non, Je Ne Regrette Rien (Sofie)
EU Commission wants anti-drone defenses at Brussels HQ
Rondo Alla Turca
Von der Leyen’s 2nd-term pitch: More military might, less climate talk
Kiss of fire
Global Law Enforcement Dismantles Lockbit Ransomware Operation
Tom Jones - I´ll Never Fall In Love Again 1967, 1989, 2001
Prince William Urges End to Gaza Conflict
Israel Cachao López - Guajira Clásica
UK court to hear Assange's final appeal against extradition to the US, where he faces charges related to his journalistic work—the publication of a classified video in 2010 that exposed US war crimes against humanity.
Edward Maya - Stereo Love (feat. Vika Jigulina) (Extended Mix)
About 50-60% kids either chose to be YouTuber or influencer
Strauss - Radetzky March - Karajan
A viral video of Nationals MP Barnaby Joyce lying on a Canberra footpath is celebrated by his media mates.
La vie en rose
European Countries React to Navalny's Death by Summoning Russian Diplomats
The Temptations - My Girl (Smokey Robinson Tribute) 2006 Kennedy Cent
Israel has gone ‘beyond self-defence’ in Gaza, says Labour’s Streeting
Orlando Cachaito Lopez Redencion
English farmers to be offered ‘largest ever’ grant scheme amid food security concerns
Edith Piaf - NON, JE NE REGRETTE RIEN
Cameron government knew Post Office ditched Horizon IT investigation
RADETZKY MARCH-2008-Wien, New Year Concert
EU Calls for Immediate Ceasefire in Gaza Conflict
Only you (And you alone)
EU Vows To Hold Putin "Accountable" After Meeting Alexei Navalny's Wife
Strangers In The Night
EU Launches Probe Into TikTok Over Child Protection Under Digital Content Law
Charles Aznavour - La Boheme
The EU Initiates Naval Mission to Defend Red Sea Trade Routes
Summer time
EU and UK Announce Joint Effort on Migration
Sting and Stevie Wonder - Fragile (from Sting's 60th birthday concert)
Brazil's Lula Likens Gaza Operation to Holocaust, Israel Says "Red Line" Crossed
Aux Champs Elysees
Ministers Confirm Proposal to Prohibit Mobile Phone Usage in English Schools
Stand By Me - Ben E. King (Boyce Avenue acoustic cover)
Microsoft-backed OpenAI valued at $80bn after company completes deal
La Mer (Beyond the Sea) – Avalon Jazz Band
‘Alexei would want to tell Russia not to give up fighting’
She
Rwandan Footballer's Dismissal Sparks Concerns Over UK Asylum Plan
Nathalie Song by Enzo Petrachi Stjepan Hauser Cello
Whisky Challenges China's Baijiu Market During New Year Celebrations
Shape of My Heart - Sting (Boyce Avenue acoustic cover)
Avdiivka - Symbol Of Ukrainian Resistance Now In Control Of Russian Troops
Radiohead - Creep
Putin Critic Alexei Navalny's "Killers" Refusing To Hand Over Body, Say Allies
Quizás,Quizás,Quizás - Andrea Bocelli - Jennifer Lopez
"Historic Step": Zelensky Signs Security Pact With Germany
Perhaps, Perhaps, Perhaps - Multi-Couples
"Historic Step": Zelensky Signs Security Pact With Germany
Pentatonix Havana
20 Tech Giants Sign Effort To Fight AI Election Interference Across Globe
Paula Cole - Autumn Leaves
Joe Biden Accuses Putin of Causing Navalny's Death
Oscar Benton Bensonhurst Blues
Russian opposition leader Alexey Navalny has died at the Arctic prison colony
OH NANANA vs ABUSADAMENTE
Tucker Carlson grocery shopping in Russia. This is so interesting.
Nina Simone - ”I Put A Spell On You”. Vezi aici cum cântă Jeremy Ragsd
Julian Assange's Wife Warns of His Death if Extradited to US
NIGHTWISH - The Phantom Of The Opera
‘A lot higher than we expected’: Russian arms production worries Europe’s war planners
Motorshow 2016 Tanjay Negros Oriental
Greece Legalizes Same-Sex Marriage and Adoption Rights
Monica Bellucci - Ti Amo
Hungarian Foreign Minister: Europeans will lose Europe, the Union's policy must change drastically
Michael Jackson - Billie Jean Milena The Voice France 2018
In Britain Homeowners are receiving CPO’s (Compulsory Purchase Orders) so their homes can be redistributed to migrants
Michael Buble (Help Me Make It Through The Night) feat Loren Allred
Memories Canon In D - Maroon 5 (Boyce Avenue piano acoustic cover)
Matteo Simoni - Marina
Maroon 5 - One More Night
Maroon 5 - Memories
Mark Knopfler - Brothers In Arms (Berlin 2007 Live)
Mark Knopfler & Emmylou Harris - Romeo And Juliet (Real Live Roadrunni
Marina, Marina - The LUCKY DUCKIES intimist live concert at Guimarães
Major Lazer & DJ Snake – Lean On Mauranne The Voice France 2016
Love Theme from Romeo and Juliet - Joslin - Henri Mancini, Nino Rota
LoLa & Hauser - Love Story
Linkin Park Jay-Z - Numb Encore (Live 8 2005)
Hallelujah Mennel Ibtissem, The Voice France Leonard Cohen
Leonard Cohen - Dance Me to the End of Love
Leonard Cohen & Natasha Rostova - Dance me to the end of love
La casa de papel - Bella Ciao
La Camisa Negra
L'italiano (Toto Cutugno) - The Gypsy Queens
Juanes - La Camisa Negra
Jonathan and Charlotte - Britain's Got Talent 2012 Live Semi Final - U
John Powell - Assassin's Tango
Joe Cocker - You Can Leave Your Hat On (LIVE in Dortmund)
Joe Cocker - Unchain My Heart 2002 Live
Joe Cocker - A Whiter Shade Of Pale
Jay Z & Alicia Keys - Empire State of Mind LIVE
Jason Mraz - Im Yours (live)
Jarrod Radnich - Bohemian Rhapsody - Virtuosic Piano Solo
James Blunt - You're Beautiful
James Blunt - You're Beautiful & Bonfire Heart (Live at The Nobel Peac)
If You Go Away - Helen Merrill & Stan Getz (Tribute to Virna Lisi)
I'LL BE MISSING YOU
I Say a Little Prayer
Hotel California ( Eagles ) 1994 Live
Historia de un amor - Luz Casal. Vezi interpretarea Biancăi Sumanariu
Here Comes The Sun - The Beatles (Boyce Avenue acoustic cover) on Spot
Heart - Stairway to Heaven Led Zeppelin - Kennedy Center Honors
HAVANA by Camila Cabello Zumba Pre Cooldown TML Crew Kramer Pastra
HAUSER and Señorita - I Will Always Love You
HAUSER - Waka Waka
HAUSER - Sway
HAUSER - Lambada
HAUSER - Historia de un Amor
HAUSER - Despacito
Great Pretender
Georgia May Foote & Giovanni Pernice Samba to 'Volare' - Strictly Come
Gary Moore - Still Got The Blues
GIPSY KINGS VOLARE Penelope Cruz
Fugees - Killing Me Softly With His Song
French Latino - Historia de un Amor
For A Few Dollars More The Danish National Symphony Orchestra (Live)
Flashdance • What a Feeling • Irene Cara
Filip Rudan - “Someone You Loved” Audicija 4 The Voice Hrvatska Sez
Eric Clapton - Wonderful Tonight
Enya - Only Time
Enrique Iglesias - Bailando (English Version) ft. Sean Paul
Enrique Iglesias - Bailamos
Elena Yerevan Historia de un amor
Ed Sheeran - Shape of You (Official Music Video)
Ed Sheeran - Perfect Symphony [with Andrea Bocelli]
Ed Sheeran - Perfect (Official Music Video)
Easy On Me - Adele (Boyce Avenue 90’s style piano acoustic cover) on S
ERA - Ameno
ELENA YEREVAN- Cancion Del Mariachi-IN STUDIO-2017 DPR
Dust In The Wind - Kansas (Boyce Avenue acoustic cover)
Don't Let Me Be Misunderstood
Despacito x Shape Of You - Pentatonix
Deep Purple - Child In Time - Live (1970)
David Foster When A Man Loves A WomanIt's A Mans World (SealMichael Bo
Dance me to the end of Love ( Pi-Air Design )
Coolio - Gangsta's Paradise (feat. L.V.) [Official Music Video]
Conquest Of Paradise (Vangelis), played on Böhm Emporio organ
Cielito Lindo
Chico & The Gypsies - Bamboleo
Canción Del Mariachi - Antonio Banderas, Los Lobos • Desperado
Camila Cabello - Havana (Audio) ft. Young Thug
Camila Cabello - Havana ( cover by J.Fla )
California Dreamin' - The Mamas & The Papas José Feliciano (Boyce Ave
Buster Benton - Money Is The Name of The Game
Hallelujah Pentatonix
Bobby McFerrin - Don't Worry Be Happy (Official Music Video)
Bob Dylan - Knockin' On Heaven's Door Emilia The Voice Kids France
Besame Mucho - Cesaria Evora
Ben E. King - Stand by Me Sax Cover Alexandra Ilieva Thomann
Bella Ciao
Bella Ciao - INSTRUMENTAL
Beautiful in White x Canon in D (Piano Cover by Riyandi Kusuma)
Bad Romance - Vintage 1920's Gatsby Style Lady Gaga Cover ft. Ariana Savalas & Sarah Reich(1)
BELLA CIAO 2020 - KARAOKE ITALIANO
BAMBOLEO - Gipsy Kings • Antonio Banderas, Katya Virshilas
BAILANDO (original)
Awesome Ukrainian yodeler - SOFIA SHKIDCHENKO (with English subtitles)
Avicii - The Nights
Atom - The Great Gig in the Sky
Aretha Franklin - (You Make Me Feel Like) A Natural Woman (Official Ly
Antonio Banderas - Cancion del Mariachi (Desperado)
André Rieu - Zorba's Dance (Sirtaki)
André Rieu - Can't Help Falling In Love
André Rieu & Mirusia - Ave Maria
Andrew Reyes Elton John - Don't Let The Sun Go Down The Voice 2020 (
Andreas Kümmert Whiter Shade Of Pale The Voice of Germany 2013 Showd
And I Love You So
All About That Bass - Postmodern Jukebox European Tour Version
Alan Walker - Faded (Piano Cover)
Ain't No Sunshine -- Bill Withers (cover by Canen 12 y.o.)
African music
Adriana Vidović - “Creep” Audicija 4 The Voice Hrvatska Sezona 3
Adriana Vidović - “Believer” Nokaut 3 The Voice Hrvatska Sezona 3
A Fistful of Dollars - The Danish National Symphony Orchestra and Tuva
4 Beautiful Soundtracks Relaxing Piano [10min]
2CELLOS - Whole Lotta Love vs. Beethoven 5th Symphony [OFFICIAL VIDEO]
2CELLOS - Smooth Criminal (Live at Suntory Hall, Tokyo)
2CELLOS - Smells Like Teen Spirit [Live at Sydney Opera House]
2CELLOS - Despacito [OFFICIAL VIDEO]
13 Year Old Girl Playing Il Silenzio (The Silence) - André Rieu
094.All About That Bass
00 - SADNESS PART 1
(Ghost) Riders In the Sky (American Outlaws Live at Nassau Coliseum, 1
(Everything I Do) I Do It For You - Bryan Adams (Boyce Avenue ft. Conn
What a wonderful world
Moon river
×