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What the Bank of England’s intervention means for your pension

What the Bank of England’s intervention means for your pension
What the Bank of England’s intervention means for your pension

Anyone who belongs to a pension scheme will have been alarmed by news that the Bank of England has stepped in to rescue them.

But is your retirement in danger? We explain what today's events mean for your pension.

What types of pension scheme did the Bank rescue?

Its actions relate to private sector final salary or "defined benefit" schemes, those that pay workers a percentage of their salary on retirement. These pensions are regarded as the gold standard because they are guaranteed and do not depend on investment performance. They are also inflation-linked.

Final salary schemes are becoming rarer in the private sector. Their more modern replacement, defined contribution schemes, work differently and so did not need action from the Bank.

Almost all public sector final salary schemes also work differently. These are funded on a "pay-as-you-go" basis by the employer, backed if necessary by the taxpayer, so they were not in danger.

Why was there suddenly a problem for some final salary schemes?

The gyrations in the financial markets of the past few days put their finances under pressure. The details are highly complex because these schemes use sophisticated techniques, in conjunction with other parties such as investment banks, to balance their assets with their commitments to members.

In times of severe stress in the government bond markets, of the kind witnessed in recent days, these techniques no longer function to reduce risk and instead increase it.

What did the Bank do and did it work?

The pension schemes’ methods for managing risk can come unstuck if gilt prices change suddenly. This is exactly what has been happening, so the Bank acted to stabilise them.

Gilt prices had been falling sharply and the Bank said it would buy them in whatever quantities necessary. The sudden appearance of a major new buyer put supply and demand back into balance and stopped the price from falling further.

What if the Bank’s actions hadn't worked? Would my pension have been at risk?

Members of final salary schemes are very well protected. First, the scheme’s managers and trustees are required by a strict regulatory regime to keep it adequately funded. Then, if it finds itself short of money, it can ask the employer concerned to contribute more.

Finally, there is a lifeboat scheme, the Pension Protection Fund, if the scheme fails. This ensures that pensioners receive all, or almost all, of their entitlement.