is my pension safe

Is Your Pension Safe in 2022?



Posted on: 26th October 2022

If you have been following the rocky roads around the September financial markets following the government’s mini-budget huge tax cut promises going back and forth, you may be left wondering – “Is my pension safe?”, “Where is my pension standing in all of this?”

Naturally, every action and u-turn that the government makes at the moment must be giving people whiplash around financial uncertainty ahead. The falling value of the pound and government borrowing costs climbing is fuelling many fears for the financial outlook of some pension funds.

However, many people who have consulted with independent financial advisers Cheshire understand that there are very strong protections for pension schemes and that the threat of losing your pension is not as big as you think.

How Pension Funds Were Affected

Gilts, a sell-off in government bonds, proved a big move following the government mini-budget. These are practically IOUs from the government sold to raise money for public spending.

The government agrees on repayment to the investor on a set day in the future and pays the interest along the way to it. The mini-budget provided a challenge to confidence in the bonds, where investors then began to demand higher interest rates in return for buying them. This caused problems on the pension fund front, which often buys bonds as a safe investment.

Pension funds affected are typically known as final-salary schemes, paying a proportion of people’s salary at their retirement point. However, the majority of people are within defined contribution schemes, determined by the amount of money that people pay and how well the scheme’s investments perform over the long term. These schemes don’t invest as much in government bonds and are less affected as a result.

In stabilising the situation, the Bank of England started buying up to £65bn of government bonds from pension funds as a temporary measure.

Does Bond-Buying Schemes Aid Pension Funds?

On top of investing in government bonds, pension funds also provide insurance to protect their value. As the government borrowing costs increased, insurance providers began demanding additional payments, causing pension funds to be forced to sell bonds to fund them.

The more they sold, the more government borrowing cost increased, which then increased the price of insurance payments, leading to – you guessed it – more bond sales. If this was to continue, some pension funds could have landed in the position of being unable to pay their debts. The Bank of England programme was instigated to prevent government bond prices from dropping further, limiting the need for pension funds to sell.

For the time, the Bank’s bond-buying intervention has successfully done the trick, and the imminent threat to defined bank schemes’ financial stability seems to have passed. For those seeking more pension advice Manchester, contact the team at Haven IFA today.