The Bank of England should have delayed its rate-setting meeting until after the government’s mini-budget to have avoided the crisis that rocked pension funds last week, a former pensions minister said today.
Steve Webb, a partner at LCP and former Lib Dem pensions minister in the coalition government, said that shifting the rate decision until after Liz Truss and Kwasi Kwarteng revealed their fiscal plans would have helped ease concerns that sent gilt prices plummeting.
Fears of a liquidity crisis spread on Monday as pension funds deploying so-called Liability Driven Investment (LDI) were forced to stump up cash to meet hefty collateral calls.
But Webb said that some of the adverse reaction could have been dampened in advance by the Bank.
“I can’t understand why the Bank, having already put its interest rate setting meeting back a week because of the Queen’s funeral, couldn’t have put it back two more days and done it after the budget,” Webb told City A.M..
“To have a rate setting meeting before a big fiscal event, which even without the unexpected stuff was going to be potentially £100bn plus of energy bill support… Why wouldn’t you do it on Saturday not Thursday? I can see no justification.”
The decision to roll out an interest rate hike at the softer end of the scale also did not help to temper concerns, Webb added.
The Bank was forced to step in with a bond buying programme of up to £65bn to steady the volatility in the gilt market after pension funds called Threadneedle Street warning of potential defaults.
Webb said today that fears of mass insolvencies were misplaced however, and fears that pensions pots would evaporate were misplaced.
“The fundamental funding position of many defined benefit schemes is better than it has been in a long time,” he said.
“What we had was a liquidity issue, not a not a solvency issue. As long as the scheme sponsor employer is still kicking around, then your pension is absolutely safe.”
Webb’s comments come as PwC looked to pour cold water on fears that pension pots were at risk today. Analysis from the big four firm found that the schemes collectively have a “healthy surplus” of £295bn, assuming they stay attached to the corporate sponsor and invest in “low-risk income-generating assets like bonds”.
Calls have grown for an inquiry into the proliferation of LDI strategies amid the fallout of the Bank’s intervention however.
The Work and Pensions Committee said on Sunday it would write to the Pensions Regulator this week “about issues raised by the Bank of England’s intervention”.
The Bank of England declined to comment.