Did your final salary pension really almost go bust after the mini-Budget?

17 November 2022

Back in September 2022, the former chancellor of the Exchequer, Kwasi Kwarteng, announced his autumn mini-Budget. 

Speaking in parliament, Kwarteng announced a series of sweeping tax cuts and policy changes, including abolishing additional-rate tax and removing the cap on bankers’ bonuses.

Following the announcement, many investors sold of UK assets for fear of the ramifications of Kwarteng’s changes. As a result, the pound hit an all-time low against the US dollar. 

Despite many of the policies now being reversed, and a new chancellor being in place, the damage had already been done to international investors’ confidence in the UK market.

One key ramification of Kwarteng’s mini-Budget is the instability it brought to defined benefit (DB) pensions. In October 2022, the Bank of England (BoE) claimed DB pension funds “almost collapsed” following a “market meltdown”, the Guardian reports.

Read on to find out whether your pension was at risk, and how the BoE acted to stabilise the volatile market following Kwarteng’s controversial mini-Budget.

The mini-Budget volatility saw liability-driven investments verge on going bust, the Bank of England claim

If you have a defined benefit (DB) pension, also known as a “final salary” pension, your employer guarantees your retirement income every year from when you stop work until you pass away. This income is usually based on your average or final salary at the company and your length of service. 

DB pensions rely on liability-driven investments (LDIs). LDIs are strategically made investments that provide low-risk returns, often from gilts that yield fixed interest every year. 

Crucially, after the mini-Budget, there was a widespread sell-off of UK gilts. This broad-stroke sale at low prices caused a spike in yields and severe volatility on LDIs – and, in turn, DB pension schemes. 

Importantly, DB pension schemes post cash as collateral against their LDIs, in case market volatility causes a downswing – which is exactly what happened at the end of September. As gilt values dropped, DB schemes were required to make up the difference with the cash they put against their investments. 

However, the volatility caused by the mini-Budget was so severe that DB schemes were overwhelmed with collateral requests, and were forced to the verge of collapse in just a few short days. 

The Bank of England spent billions buying up bonds to prevent LDI market collapse

In order to prevent a collapse of the £1 trillion LDI fund market, the BoE stepped in, pledging to buy up £65 billion in UK gilt bonds between 28 September and 14 October.

While the purchases fell short of this figure, the BoE did enough to prevent the market from failing altogether.

So, if you are set to receive (or already receiving) a final salary pension, it is important not to panic. While things looked briefly precarious for DB pensions, the BoE’s actions protected your workplace pension from going bust. 

Indeed, even if your pension “went bust”, either through a market collapse or your employer being forced into liquidation, it is likely the Pension Protection Fund (PPF) would compensate a portion of your income.

Since the mini-Budget, MPs have launched an inquiry into the apparent precarity of the LDI market 

Despite the fact that DB pensions did not actually collapse after Kwarteng’s mini-Budget announcement, some MPs have called the viability of LDIs into question. 

Indeed, the Guardian reported on 24 October 2022 that the work and pensions committee, led by Labour MP Stephen Timms, have addressed concerns about the “lessons that should be learned” from this market shock. 

The committee have launched a “short inquiry”, set to review:

• The regulation process for DB pensions
• The risk management of LDIs
• The viability of LDIs when linked with pensions.

While it is yet unclear what the results of this inquiry will be, it could be that DB pension scheme regulations and risk management are tightened since September’s period of severe volatility.

Importantly, your pensions are safe for now, and there is no need for immediate concern. However, if you wish to review your pension circumstances after this short period of precarity, your financial planner can answer any questions you might have. 

Defined contribution (DC) pensions have also been affected by recent market volatility

If you pay into a DC pension pot, you might be wondering where your fund sits amid the recent chaos. 

Although your DC pension pot is unlikely to be invested through an LDI strategy, that doesn’t mean it is immune to volatility. 

Indeed, market volatility – which saw the pound slump to its lowest levels on record at the end of September – could have caused your pension fund to somewhat diminish in value this year. 

Plus, if you are already drawing your pension, your fund could be stretched by rising inflation. The Office for National Statistics (ONS) reports that inflation reached 11.1% in the year to October 2022, sparking concern among retirees about the spending power of their pension fund. 

So, no matter your circumstances, it could be wise to work with a professional while the markets remain unstable and inflation remains high. 

Get in touch

For questions about how your pension might fare in this era of market volatility, get in touch today. Email info@depledgeswm.com or call 0161 8080200.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.