The Bank of England yesterday confirmed its bond-buying operation would end on Friday 14 October, following its emergency intervention to stabilise the market and avoid a pension fund ‘fire sale’ risk.

It was sparked by the government’s unfunded tax cuts announced in the mini Budget which saw a pension fund sell-off.

Dan Ashmore, analyst at Invezz, explained: “The problem with regards to the sell-off in gilts is that pension funds rely on these assets as a sort of hedge against their liabilities. With the sell-off so severe, these liability-matching pension funds were required to put up cash against the falling value of their positions, to make what is known as a margin call.

“Of course, this only led to even more selling, and hence a further fall in prices, which caused more selling – and a vicious spiral was triggered. The Bank of England hence stepped in to buy these bonds, given the risk to financial stability that the meltdown would cause.”

Earlier reports today suggested the Bank was considering extending its support beyond Friday.

But governor Andrew Bailey told the BBC this afternoon that the Bank had been clear its help would be temporary.

He added it was “down to financial firms to arrange their affairs” and pension funds had “an important task to ensure they’re resilient”.

Concern for pension savers

So, should pension savers worry about this cliff-edge stop to the emergency support?

Ashmore said pension holders shouldn’t be overly concerned.

He said: “The Bank has made it clear that it will not allow financial stability to ripple like a contagion, while pensions will be – and are – getting defended vociferously. This mainly amounts to a liquidity crisis, and once these issues are overcome, the bonds held by pensions should pay a higher rate of interest over the long-term.

“The doomsday scenario is whether more pensions than anticipated are engaging in complex investment instruments, such as derivatives that have got caught up in the mess. This could cause funds to lose value, however, it remains an unlikely scenario and one that, in any case, would affect a minority of pensions.”

For Laith Khalaf, head of investment analysis at AJ Bell, many pension funds “clearly think the Bank of England should extend its lifeline”, but for pension savers, it’s important to note the effect is largely on defined benefit schemes, not defined contribution schemes.

He said: “Most people nowadays hold defined contribution pensions and the key thing to understand here is that these are not the types of pension scheme thrust into the headlines in the last two weeks. Defined contribution pensions may hold some bonds, but they will mostly be invested in equities, with the exception of annuity hedging funds.

“This means in general their exposure to the gilt market is limited. The bond sell-off has also been accompanied by falling equity markets this year and so most people’s pension pot will be smaller than at the beginning of 2022, but after a very long period of growth. This is simply the normal waxing and waning of markets and not something to be too worried about, especially seeing that pension savings are long-term and receive regular monthly contributions, which are now buying in at lower prices.”

Khalaf added: “By contrast, defined benefit pension schemes are at the centre of the current crisis, and yet there are several layers of protection which mean individual members of these schemes aren’t in the firing line. These schemes are known as ‘gold-plated’ for a reason, because not only are they generous, but they are guaranteed by the employer, or ex-employer, of the pension member. So even if the pension scheme doesn’t have enough assets to cover its liabilities, it can ask the employer to put more money in. The worst-case scenario is if the pension scheme doesn’t have enough assets to cover its liabilities, and in addition the employer goes bust. But even in this situation, the scheme will fold into the Pension Protection Fund (PPF), which will provide benefits to savers at, or close to, the promised level.”

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, added: “People who are members of defined benefit pension schemes do not need to worry – this is a problem for your employer to resolve, not you.

“In defined benefit schemes it is the employer who is ultimately responsible to make up any shortfall in the funding of the scheme, not you.  However, this issue acts as a good prompt for you to review your retirement savings.”