Basically pensions used gilts as collateral because it was viewed as risk free. That changed overnight.
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.