Who in their right mind puts margin on pensions? Let's just keep building the house of cards higher and higher, that's a very good idea.
Either way, this is something that has been warned about since QE started, the BoE repeatedly denied this was an issue, it was obvious, multiple books have mentioned this, I have heard it a million times from market participants, I talked about this with other people...and the BoE are trying to shift the blame feverishly.
The chances that this doesn't happen in other countries is close to zero. The buildup in risk due to QE has been massive, and DB pension funds are patient zero.
https://www.ft.com/content/5802c53b-3130-462c-8fb3-e3e6203f1...
Mostly yes, but depends on the topic.
Anything where Brexit can be involved (anything about an EU or EU country problem, or UK issue), there's a bunch of stupid comments, mostly empty pro-Brexit ones.
Anything tech is usually mostly technically oblivious financial people (oh VMware have a great position, numbers looking good, tech is amazing).
Anything where Russia is involved, there's at least a few (idiots|Russian trolls|etc.) getting eviscerated.
The fundamental problem of our current monetary system is unstable interest rates. Pension funds can't fulfill their purpose under these circumstances. Not without taking risks, at least.
What is not risk-free is the value of those bonds before reaching maturity. That price is decided by the market (i.e. you need to find someone to buy them from you, therefore there is a price to be negotiated). Why? Because when the government issues new bonds at higher interest rates why would anyone still buy the old bonds at the same price? If you want to sell those bonds on the market you will have to sell them at a discount. OR you can hold them to maturity and get paid in full.
What went from here is that those pension funds used those bonds as collateral (the value of which is decided by the market). Since the market value of those bonds is falling now due to rising rates, the value of the collateral is decreasing thus margin calls.
Everyone knows this and no one seriously thought this was risk free. The simple fact is that all these pension schemes are underfunded yet there is the expectation that they still pay out pensions like they did 50 years ago. How to solve this? You take on risk!
Im not saying that the bankers are all nice guys here but it’s not solely their fault. There is some context here. People just prefer to sweep away problems until there is no more place to hide them. That’s the real issue here.
And to your point about broken yield curve… to some extend I agree that governments should step in when there are technical liquidity issues (i.e there is temporarily not enough money to go around but all business is sound) but at some point you have to wonder if there is no liquidity simply because no one wishes to buy these assets in the current market.
We may not remember but interest rates have been above 10% before, and with inflation where it is at now, it might simply be that the market expects yield to go up significantly in the near future thus it would make sense for the yield curve to invert. Is it then that BoE is solving liquidity issues or again bailing out failing pension schemes? I don’t know of course it’s just a bit smelly.
You’ve now gone from a durable bond as long as it’s held to maturity to a derivative based house of cards vulnerable to bank runs.
We have seriously degraded the world stability the last 2 years.
Edit: see sibling comment for clarification.
They should not be allowed to manage money backstopped by the public. But letting them lose private capital is fine.
In order for pensions to meet mandates, central banks forced them to take on ever increasing risks as part of a 15 year period of relentless QE. The end of this story has been foretold by many people over the past decade, but as always the response was "it's different this time". It turns out it wasn't
You can blame the pension managers for taking on excessive risk, but if they didn't then their returns would not have met mandated targets and granny's pension would suffer. Instead blame central banks and electorate which applauded their moves. Most people did not complain as equity markets surged higher for a decade, and borrowing costs dropped to zero on a real basis driving their housing equity higher. Average people gobbled up stimmy checks and even now look to the government to cap utility bills and shield them from the realities of the world.
We have coddled ourselves into thinking that we can only have good times. But that's not how economies and markets work. They are cyclical: boom and bust. We have gotten better at smoothing some things out, but you can't prevent downturns in aggregate, which is what we've tried to do since 2008. All you do is compound the issues in the future, which will eventually come home to roost. This is what is happening now.
"I know this is bad but I find something aesthetically beautiful about it. If you have a pot of money [pensions] that is immune to bank runs, over time, modern finance will find a way to make it vulnerable to bank runs. That is an emergent property of modern finance. No one sits down and says “let’s make pension funds vulnerable to bank runs!” Finance, as an abstract entity, just sort of does that on its own."
Jesus these people are sick
I had no idea defined benefit pensions were still a thing.
US States cannot go bankrupt (They are not only not covered by bankruptcy law, but there is a reasonably strong argument that state bankruptcy would violate the contracts clause. (And the public entities that can go bankrupt via municipal bankruptcy in US law do not legally dissolve when they do.)
> This is why I expect a federal UBI.
That seems…unrelated.
So it's going to be a long time before all those people, both retired and not, are dead.
Plus the public sector in the UK still offers them.
For some reason when they realised they were a bad idea they got rid of them for everyone else but themselves.