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UK pensions hit with margin calls as gilts and sterling slide
- LeoPanthera 4y agoThis is very out of date. The most recent developments: https://www.bbc.com/news/business-63065415 https://www.bbc.com/news/business-63065415
- themitigating 4y agoVery out of date?
- unity1001 4y agoPeople's well being should not be left to 'the market'. Anything like people's retirement, health, education should not even be entangled with private actors and their whims, less, sold to such private actors.
- graeme 4y agoTo run a pension you need assets. You buy those on the market. But wait. Why buy private assets. Why not have the government make its own assets. Like….a govt bond. Well, those are substantial portions of pension assets. You could fund pensions from general tax revenue. But, then what happens if tax revenues are low one year….do you just not pay out the pensions? At a certain point you’re on the market whether you like it or not. Even communist countries own assets
- unity1001 4y ago> To run a pension Taxes. You need taxes. Just like how you run the military. > then what happens if tax revenues are low one year You tax the top iter of the society to make up for it. Just like how it is done for the military. > Even communist countries own assets In no communist country, the well being of their people or societal infrastructure ranging from transportation to military to police or education, was tied to the market. Even today there are many capitalist countries that dont do that.
- graeme 4y agoTaxes fund current military expenses. Pensions are designed to fund tomorrow’s expenses with today’s money. You need some sort of instrument to do that. If you don’t save current resources for future expenses, then you risk needing a very large future amount of the tax base for pensions. If, for example, more people retire. Even for the military they used war bonds and took on debt in wars when the wars demanded outsized current expenses. They didn’t just raise taxes really high in WWII to pay for everything. They paid for it over time with bonds. The Soviets did the same in agreeing to repay lend lease bonds.
- collegeburner 4y agouhhhh no? i don't think most countries levy extra random taxes on the super-rich until their military budgets are met. also i get really fed up with people pretending that military spending is anywhere close to entitlement spending these days. yeah it's too high but please don't both-sides it. it's unfortunate but usually when there's a downturn, revenues drop. yes including from the super-rich, whose net worths are usually more not less volatile. so now what?
- unity1001 4y ago> i don't think most countries levy extra random taxes on the super-rich until their military budgets are met Most countries don't do that because the funding for military is never excluded from budget calculations. But when such a need arises, like in wartime or emergencies, they do. > i get really fed up with people pretending that military spending is anywhere close to entitlement spending these days Only in the US, where military has been made into a teat from which the military-industry sector sucks as hard as it can. That way you end up with gigantic flops like F-35 that go on forever. They are flops for defense, but they are major successes for channeling public money to the industry...
- collegeburner 4y agothis is just... dead wrong. like factually, you are wrong. FY 2021: entitlements were $1.18T (social security) + $697B (medicare) + $537B (welfare) + $396B (unemployment) = $3.329T military was $1.035T. if it helps, 3.329 / 1.035 = 3.22. that number means we spent over 3 times as much on handouts. so no, military spending is nowhere close to our handout spending. yeah it's inefficient and wasteful and i favor cutting it at least somewhat combined with efficiency improvements and focusing on spreading defense $ to make the market more competitive. but i get really fed up with people trying to "both sides" our handout and military spending every time someone brings up the cost of the former because they just aren't close.
- malermeister 4y agoI would add housing and infrastructure to that list.
- mellavora 4y agofunny enough, lots of pensions are getting into the real estate game. Owning housing give a long-term stable source of revenue (rents), making it a really good investment from a pension policy point of view.
- pjfin123 4y agoI don't think defined benefit pensions are a very good idea.
- mensetmanusman 4y agoThe war strains of winter begin…
- armchairhacker 4y agodidn’t the UK prime minister Liz Truss just pass tax cuts for the rich? And isn’t the UK in a massive recession right now with a heating crisis expected this winter? And wasn’t Liz Truss sworn in somewhere like, less than a month ago (expecting she won’t stay elected for long with the way things are going)?
- citizenkeen 4y agoThis is a lot of the UK’s first time in a D/s relationship, and it’s going to hurt.
- sfvegandude 4y agoDom/Sub?
- socialismisok 4y agoIt's a reference to the fact that Liz truss wears a necklace that's very similar to a day collar, typically worn by submissives. A necklace with an o on the front is a signal to some folks.
- cjbgkagh 4y agoI imagine people don’t think it’s maintainable and a reaction to it might be quite anti-business. I.e. it’s a drop in stability.
- sp332 4y agoYes, tax cuts that were to be funded by going into a lot of debt. [Deleted the vacation bit]
- gonzo41 4y agoI cannot imagine the King is happy with that. Not a good way to start.
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- xupybd 4y agoWhy are pension funds borrowing money?
- twawaaay 4y agoThat is very good question. These guys probably think they can predict the future, and we all know that's just not possible. Personally, I think it is hard enough to invest long term in stock issued by reputable companies. At least with companies you can try to understand their situation and whether they are likely to succeed and worth their share price.
- olladecarne 4y agoPension funds take money from poor people and give it to rich people, just like everything else. When the economy is doing well, rich people make billions by managing them, and when it's not doing well rich people still make billions until the funds become insolvent. Here's a PBS documentary on the state of pensions in the US: https://youtu.be/_r0htm5uHPQ https://youtu.be/_r0htm5uHPQ
- sicp-enjoyer 4y agoSomehow I don't think you're giving the full picture.
- socialismisok 4y agoWhat's missing from the picture?
- sicp-enjoyer 4y agoWell any kind of nuance or perspective. Here is one thing to consider. A pension trades returns for stability. People pick a pension as their form of retirement because they have a lower risk tolerance. Anytime these tradeoffs are happening you are going to see wealthy people who took the risk side and came out ahead. Did you know your insurance company is getting rich off your premiums? Are you going to stop paying them and get out of this "greedy" arrangement that takes from poor you to rich them? Obviously my comment isn't the full picture either. These institutions often have moral hazard, etc.
- anm89 4y agoDon't worry, once global sovereign credit markets freeze, itll just be a mild recession. A slow quarter or two and right back to line goes up and yoloing on dog coins. No systemic risk here! We killed that in 2008 according to every wall street analyst on cnbc.
- kasey_junk 4y agoThe Bank of England has taken action since this was published. Todays Money Stuff discusses: https://www.bloomberg.com/opinion/articles/2022-09-29/uk-pensions-got-margin-calls https://www.bloomberg.com/opinion/articles/2022-09-29/uk-pen...
- twawaaay 4y agoBetting pensions on margin instruments?
- orwin 4y agoEdging mostly.
- ls612 4y agoI know you meant hedging but the typo is funnier.
- djbusby 4y agoEnglish pronunciation ;)
- YawningAngel 4y agoWe say the h
- twawaaay 4y agoHedging... funny. It sounds important and smart until you realise, in simple words, what it means. I hate those kinds of words because they obscure the simple reality. When you invest in something you basically say that out of all possible options that were available to you, you predict the one you invest in will most likely (according to your risk assessment) bring profits. If this was your best choice, WHY IN THE WORLD would you invest in something that is doing the opposite? And there are other reasons not to play with borrowed money... Common sense says any kind of borrowed money costs. Hedging is used in short term situations, where you want to insulate yourself from market fluctuations. Say you are Lufthansa and you have tight budget and you don't want your budget ruined by changes in fuel prices. Knowing how much fuel you will need and at what time, you hedge against those changes. It will cost you but you treat this cost like insurance against disruptions of your business.
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- lvl102 4y agoI find it ridiculous that the strong USD, which is the main cause of pending global financial crisis, was directly brought on by Federal Reserve’s head in the sand moments: (1) not raising rates or even stopping QE prematurely when inflation was flashing bright neon red, then (2) ignoring all the data points to overcompensate for its gross negligence in (1). UK is not isolated here. We are on the cusp of an avalanche across developing countries and EU.
- asdfasgasdgasdg 4y agoAs far as I understand, weakening the USD for the benefit of parties foreign is not part of the federal reserve's mandate. Maybe it should be but it isn't. I'm also not sure how continuing with inflationary policy could strengthen the USD. Surely any delay in raising rates should weaken it relatively speaking? Also, it is natural for the USD to appreciate given the energy crisis and knock on effects from that, isn't it?
- djbusby 4y agoWhy natural? Is it some effect of the "petro-dollar" thing?
- theplumber 4y agoU.S sells a lot of oil and gas and as it happens Europe needs both. A lot of capital is fleeing from Europe and other risky markets(China) to safe havens( the U.S). All this in addition to the fed rate cuts.
- djbusby 4y agoDid you mean rate hikes? Isn't US Fed raising?
- theplumber 4y agoRate hikes indeed
- seer-zig 4y agoWho 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.
- dboreham 4y agoSomething, something, defined benefit, it seems. I had no idea defined benefit pensions were still a thing.
- blockwriter 4y agoThey’re enshrined in the constitution of my home state, Illinois, for the public sector, I believe.
- tofof 4y agoNot that the legislature met the obligation of actually funding them for like 30 years, though.
- bushbaba 4y agoGoing to be an interesting next 2 decades as these funds insolvency becomes an issue.
- landemva 4y agoEither feds take over this obligation, or Illinois will go bankrupt, legally disolve, and the land will be absorbed by neighboring States. This is why I expect a federal UBI.
- collegeburner 4y agowhy th should i be paying for illinois underfunding its pension obligations. this is not some natural disaster where the government couldn't predict it, so screw that. i hope all the other 49 states vote against any of that nonsense.
- orwin 4y agoBy the way, once again I'm impressed with the BoE reaction. They got burned some 30 years ago, and since then they reacted correctly and fast enough to each crisis, while the Fed and ECB do slip up sometime (keeping policies too long or not reacting fast enough). What's troubling is that for the first time, they do not react to an external crisis or a bubble bursting, but to their own government fucking up. I do not care about UK politics as much as I did when i wanted to emigrate there, so i follow it loosely at best, but the Tories choose the worst time to have an internal campaign. Because it wasn't followed by a national campaign where the internal promises have to be dilluted for the national interest (and swing vote).
- jorvi 4y ago> while the Fed and ECB do slip up sometime (keeping policies too long or not reacting fast enough). The ECB is perpetually paralyzed by needing to acquiesce to the demand of born financially solid, and financially shaky members (of which there are a lot). It is not incompetence but inability that binds the ECB.
- seper8 4y ago3 months into financial tightening and pension funds already facing margin calls. Very promising.
- vasco 4y agoThis winter is going to be interesting.
- isthisthingon99 4y agoIf you know the bigger your failure, the quicker you can get bailed out and if you are successful, you get to keep most of the profits, you will do whatever and never hedge properly or take losses on the books. This is the current system with central banks.
- NovemberWhiskey 4y agoWhat is going on in the UK is not, in any imaginable sense of the expression, "financial tightening": the "mini-budget" that prompted the response from the market is a $161bn tax-cut and spending plan funded by government borrowing. https://en.wikipedia.org/wiki/September_2022_United_Kingdom_mini-budget https://en.wikipedia.org/wiki/September_2022_United_Kingdom_...
- pooper 4y ago» The September 2022 United Kingdom mini-budget was a set of economic policies announced by the Chancellor of the Exchequer Kwasi Kwarteng on 23 September 2022. Although not an official budget statement, it was widely referred to by the media as a "mini-budget". Among the policies announced by Kwarteng were: bringing forward the planned cut in the basic rate of income tax from 20% to 19%; the abolition of the 45% higher rate of income tax in England, Wales and Northern Ireland; the reversal of the April 2022 increase in National Insurance; and the abolition of the proposed Health and Social Care Levy. » The budget, which was unveiled against the backdrop of a cost of living crisis, was immediately followed by a sharp fall in the value of pound sterling against the United States dollar as world markets reacted negatively to the increased borrowing that would be needed. By the next day of trading, the pound had hit an all time low against the US dollar. The statement drew widespread criticism from economists, some of whom feared its reliance on increased government borrowing to pay for the largest tax cuts in 50 years could lead to a situation like the 1976 sterling crisis when the UK was forced to ask the International Money Fund (IMF) for a financial bailout. The IMF took the unusual step of issuing an openly critical response to the budget, saying it would "likely increase inequality".[4] It urged the UK government to "re-evaluate" the proposed tax cuts.[5] The HM Treasury announced plans to outline how the proposals would be costed in November, alongside an independent forecast from the Office for Budget Responsibility. I don't get it. Why can't the government walk back these changes? Does the prime minister think they will get ousted if they reverse this nonsense?
- socialismisok 4y agoThe UK has had some of the most banal, insiped leadership for awhile now. It seems to me that this is both a tragic and entirely predictable outcome that's ultimately going to hurt everyday folks the most.
- throwyawayyyy 4y agoIn fairness, the set of lunatics currently in charge are anything but banal. Banal and insipid would be lovely. Banal and insipid wouldn't e.g. blow up our relationship with Europe, or attempt to out-Thatcher Thatcher. I'd love banal and insipid right now...
- socialismisok 4y agoHahaha, fair. I (personally) find them evil but in like a creeping sort of way. But on the flip side I just think of Liz Truss bragging about opening new pork markets and I cannot imagine anything more banal.
- throwyawayyyy 4y agoI'll give you the pork-markets speech, yes. No, please, take it! :) Maybe the word is bathos. She wants to be Thatcher but is cursed with a modicum of humanity.
- bergenty 4y agoThat’s populism for ya. Watch Italy, Hungary and Russia end up like this over the next year.
- zimpenfish 4y ago> this is both a tragic and entirely predictable outcome Well, Sunak did predict during the leadership contest that this would happen - admittedly we haven't had the actual IMF in yet but if there's another severe slump, I wouldn't bet against it.
- yyy888sss 4y agoHeres what happened: The Bank of England (BoE) suppressed interest rates for 2 decades, driving government bonds from 6% to 2%. Pension funds typically had a high percentage of bonds, so they decided to borrow money (again, made artificially cheap by the BoE) to buy 2-3x the amount of bonds on leverage to be able to pay out the same as one 6% bond. Now the BoE is slowly raising rates to 'fight' the inflation it created over the past 20 years, which is causing these house of cards pension funds to start to tremble. The fund directors are relaxed though as have already paid themselves large bonuses every year, and after 2008 they realised they could rely on the government to come in and socialise the loses stemming from their financial recklessness.
- obblekk 4y agoThis is actually the clearest, simplest explanation I’ve read (including Matt Levine’s). I think this is the first time moral hazard made sense to me from an operational perspective. The fund manager who in old days would feel bad about risking retirees money, now legitimately feels okay knowing there’s no way they’ll go hungry. Unfortunately there’s no easy way out of this.
- ColFrancis 4y agoSure, punish the recklessness to remove the moral hazard. You can both make sure people don't starve and align the incentives. If you don't then next time it will be worse.
- nopenopenopeno 4y agoThey will go hungry, though. “Socialise the losses” means bailing out the banks, not the workers.
- xadhominemx 4y agoWell it’s completely wrong
- dereg 4y agoIt’s a completely incorrect explanation. There’s no moral hazard here, they weren’t risking pension or funds through the swap agreement. The reason why the answer isn’t clear is because pension math is boring. The thing is, you can’t fully grasp the truth unless you’re willing to engage in it.
- zarriak 4y agoNew polling out of the UK is truly astonishing. https://yougov.co.uk/topics/politics/articles-reports/2022/09/29/voting-intention-con-21-lab-54-28-29-sep-2022 https://yougov.co.uk/topics/politics/articles-reports/2022/0...
- lamontcg 4y agoIs there any way to force a vote before Jan 2025?
- switch007 4y agoVote of no confidence from the leader of the opposition (Labour) I believe. Also the budget bill is seen as a confidence vote. That would be interesting because if it doesn’t pass. That would require a lot of Tory MPs to rebel
- shapefrog 4y agoEdit: totally missed the repeal - so this is no longer the situation. Under the Fixed-term Parliaments Act, which has governed how UK Parliamentary elections are called since 2011, an election could only be triggered outside of the normal five-year Parliamentary cycle by one of two scenarios: if two-thirds of the House of Commons voted in favour of one, or if the Government lost a vote of no confidence and no alternative government was confirmed by the House of Commons within 14 days. 2/3 vote in house is basically the only way it can happen.
- dragonwriter 4y agoSince either a no confidence vote without a new government (simple majority without a replacement government getting one) or a 2/3 vote would require a rebellion within the Tories, and the former would require fewer rebels, wouldn’t it necessarily be more plausible than a 2/3 vote.
- shapefrog 4y ago
- ihsw 4y ago
- benreesman 4y agoI’d like to make kind of a meta-point about what I see as two different ways that people are talking about the issue in this rather contentious thread. To oversimplify a bit, there seems to be a crowd saying: “these pension fund managers gambled with my retirement to enrich themselves”. There seems to be another crowd saying: “if you examine the details of these transactions you’ll find that it’s neither that simple nor fundamentally even true”. I’d like to submit that the latter group, which I suspect is probably technically correct (the best kind) should possibly examine the possibility that while any isolated derivatives transaction probably makes sense and is governed by deep and sophisticated mathematics, it does seem to be the case that in sum total we see, decade after decade, a cumulatively destabilizing effect on both financial markets and the financial security of everyday folks: somehow the emergent system either is or really, really fucking appears to be privatizing profits while socializing losses while simultaneously driving up the swings of the business cycle. I love the financial mathematics stuff intellectually and this is certainty a forum that welcomes experts discussing details, but at some point we need to acknowledge that it’s high finance’s job to convince the public that they’re actually helping, not the public’s job to learn high finance. Elites that forget this for too long have historically come to very bad ends.
- redanddead 4y agoWould love to hear more of your thoughts on finance
- csomar 4y agoAny system that socializes losses to parties that are not embarking in the risk/profit is going to be exploited. Period. This is not just about finance. It's a leak. Anything that can leak for profit, will eventually leak. These attacks (and I don't mean you personally) to the free market (and derivative products) are dangerous. If the "free" market fails because it's not so free after all(socialized losses), you don't fix this by having more bureaucrats/politics involvement to run the markets. This will only make matters worse. The proliferation of politics in the markets, because of that, is also accelerating. The argument is now readily available (look at how these complex derivatives products are destabilizing the market!). This will lead to more chaos in the market, more dysfunction and more organized thefts of the market (if not from smart mathematicians than from politicians/bureaucrats) and eventually to a military rule. We've been there a few decades ago. It's sad what's happening now.
- andy_ppp 4y agoI worked for a pension fund and they are absolutely not taking risks; gilts from a country like the UK are super safe because nobody would ever elect disaster capitalists to run the economy, so things like a complete rearrangement of their economy during a massive economic downturn cannot happen…
- physicsguy 4y agoThe strategy was nuts. Pension funds were loaning gilts to banks, and then using the money to buy gilts which they then loan to banks, and then using the money to buy gilts…
- jimnotgym 4y agoIs it nuts? If everyone believes that gilts are essentially risk free (certainly what I was taught as a trainee accountant) then it seems a fair strategy. One doesn't normally expect a government to deliberately devalue its own bonds, and drive its own debt prices higher (I say deliberately because Truss its intimating that, I don't really believe it. I think they made a spectacular misjudgement and are doubling down). This strategy only looks risky if you believe that there was a risk to the assett price. Otherwise it looks smart.
- physicsguy 4y agoGilts are relatively risk free, in that they’re backed by government to pay some value out at a time in the future. Derivative products based on the price of gilts where you might have to put up collateral are not.
- mejutoco 4y agoYour description reminds me of Evergrande.
- pfortuny 4y agoIf there are margin calls for pension funds, the managers are doing things with other people’s money which these people do jot understand and would probably not consent to.
- xtracto 4y agoFrom my 10000 feet view, it looks VERY similar to what Celcius and other Crypto scams happened: People put their assets in this place as an "investment". But the fund managers get greedy and start playing all kind of lotteries with the money. Then they lose it and shrug. The difference is that these guys get bailed out by the taxpayers, while the people that invested in crypto scams get shafted.
- cbeach 4y agoThe mainstream media are still talking about the Pound sliding. Ignoring the fact it’s grown strongly over the last week. It’s clear to me why public trust in the U.K. media is down to just 34%. https://pressgazette.co.uk/trust-in-news-uk/ https://pressgazette.co.uk/trust-in-news-uk/
- malermeister 4y agoIt still hasn't recovered from the catastrophic crash the week prior. Overall, it's still a slide.
- Blackstone4 4y agoThis refers to defined benefit persons not defined contribution pension. These pensions were overly generous…
- _448 4y agoJust putting it here so that we don't forget: https://www.bbc.co.uk/sounds/play/b06kgvcn https://www.bbc.co.uk/sounds/play/b06kgvcn
- hoseja 4y agoTime for Soros 2.0!
- laylower 4y agoHow can we read the article on risk.net?