£1trillion of Brits’ pensions narrowly saved from collapse as Truss and Kwarteng accused of going AWOL during meltdown

PENSION funds holding £1trillion of British savings were narrowly saved from disaster yesterday after a day of chaos.

The Bank of England took unprecedented action to prevent a run on pension funds which could have triggered mass insolvencies.

£1trillion of Brits’ pensions narrowly saved from collapse as Truss and Kwarteng accused of going AWOL during meltdown

The Bank of England took unprecedented action to save £1trillion of British savings, spending £1billion

£1trillion of Brits’ pensions narrowly saved from collapse as Truss and Kwarteng accused of going AWOL during meltdown

PM Liz Truss and Chancellor Kwasi Kwarteng were accused of going AWOLCredit: The Mega Agency

£1trillion of Brits’ pensions narrowly saved from collapse as Truss and Kwarteng accused of going AWOL during meltdown

Ministers denied Chancellor Kwasi Kwarteng’s mini Budget last week was directly to blameCredit: Alamy

£1trillion of Brits’ pensions narrowly saved from collapse as Truss and Kwarteng accused of going AWOL during meltdown

Following the Mini-Budget on Friday the Pound dramatically fell

Ministers denied Chancellor Kwasi Kwarteng’s mini Budget last week was directly to blame, and vowed to press ahead with £45billion of tax cuts.

The Bank of England was forced into emergency action yesterday to stop a Northern Rock-style run of pension funds.

PM Liz Truss and Chancellor Kwasi Kwarteng were accused of going AWOL following a barrage of criticism over last week’s mini Budget.

Labour and some Tory MPs demanded the reversal of the abolition of the 45p top rate of income tax — which is being funded by Government debt and is blamed for spooking the markets.

Yesterday the Bank spent £1billion in a bid to calm nerves.

It also said it is prepared to buy up £65billion of long-term government debt — known as gilts — at “an urgent pace” to help restore “orderly market conditions”.

It is the first time the Bank has had to do so purely because markets were being so dysfunctional.

Mortgage panic continued with lenders pulling 1,000 deals in 24 hours amid fears interest rates could reach six per cent.

Experts said a perfect storm of higher rates, inflation and the risk of recession could see house prices plunge by ten to 15 per cent.

Neither Ms Truss nor Mr Kwarteng was seen in public yesterday.

But allies insisted the Chancellor would not resign, and that he and Ms Truss would plough on with all of last week’s £45billion of tax cuts. On a day of high drama, pension funds warned the Bank that they were just hours from going bust.

These funds owned around £1trillion of gilts.

£1trillion of Brits’ pensions narrowly saved from collapse as Truss and Kwarteng accused of going AWOL during meltdown

House prices could plunge as a result of interest rates rising

£1trillion of Brits’ pensions narrowly saved from collapse as Truss and Kwarteng accused of going AWOL during meltdown

It was feared the Bank of England could hike rates to 6% in 2023

But they were facing a run on funds because the prices of long-term gilts had halved in four days.

Fears around the health of the economy had caused the biggest sell-off of long-term government debt since the 1990s recession.

The chaos below the surface of the economy was similar to that seen with Northern Rock in the early days of the 2007/8 financial crisis.

The fear was the pension funds’ forced sell-off of gilts would result in a downward spiral of the market.

This would have had a devastating effect as value of gilts affects the prices of mortgages and loans.

Opponents said the Government had caused the crisis by not setting out exactly how it would pay for last week’s measures, which also include a 1p cut to income tax for everyone, and slashing stamp duty.

The Chancellor and PM were last night under pressure to bring forward by eight weeks a blueprint to address the debt mountain.

Totally AWOL

Cabinet ministers will be asked to find efficiency savings from their Whitehall budgets to reduce the amount of borrowing, which could mean cuts to public services.

Yet Ms Truss had promised there would be no return to austerity in her Tory leadership bid during the summer. A Tory MP said their WhatsApp groups were “lighting up like a Christmas tree” last night with the weak reaction from the heart of Government.

One MP said: “Where on earth is the PM and Chancellor to reassure people?” Another replied: “Totally AWOL”.

Ms Truss faces a growing backlash from across her party, with some urging her to reverse her mini Budget plans.

Senior Tory MP Simon Hoare said: “In the words of (ex-Chancellor) Norman Lamont on 1992’s Black Wednesday, ‘Today has been a very difficult day’.

“These are not circumstances beyond the control of Govt/Treasury. They were authored there. This inept madness cannot go on.”

Treasury sources dismissed suggestions Mr Kwarteng would quit as Chancellor after just three weeks.

The Bank of England has also faced stinging criticism for the current weakness of the Pound.

In particular, it has been accused of being too slow to raise interest rates in recent months.

But yesterday it finally hit the panic button when the threat to pension funds became clear.

These are not circumstances beyond the control of Govt/Treasury. They were authored there. This inept madness cannot go on.

Senior Tory MP Simon Hoare

Paul Dales, chief UK economist at Capital Economics, said: “This shows the Bank is going to do all it can to prevent a financial crisis and it is already working.

£1trillion of Brits’ pensions narrowly saved from collapse as Truss and Kwarteng accused of going AWOL during meltdown

The Bank of England Governor Andrew Bailey speaks to the mediaCredit: EPA

“While this is welcome, the fact that it needed to be done in the first place shows that UK markets are in a perilous position. It wouldn’t be a huge surprise if another problem in the financial markets popped up before long.”

The yield on government debts had jumped to the highest levels since 2008. Yields rise when bond prices fall because an investor wants more reward for backing a riskier financial product.

The danger was that the bonds owned by pension funds were rapidly slumping below what their accounts said they were worth. This prompted demands for cash to top-up the difference, leading them to sell billions of government debt to raise cash.

The problem was this caused a vicious cycle because the more government debt they sold, the weaker the gilt market became with prices plunging and yields rising.

As a result the pension funds would have had to keep selling into a market that was in a negative spiral.

Sources said that the Bank was concerned that pension funds would trigger a “fire sale” of government debt which would keep pushing the price lower to the point that there would no longer be any buyers.

A crash of the gilt market would be devastating as interest rates and borrowing are priced against it. The Bank’s intervention was designed to calm the market and stop the forced selling of gilts for a short period.

In a sign it was working, by the end of the day the Pound had risen 1.4 per cent to $1.0872.

Becky O’Connor, head of pensions and savings at Interactive Investor, said: “The Bank’s move was in part to support defined benefit pension schemes that have been under significant pressure to generate cash quickly, risking a vicious cycle where they would have had to sell more gilts, pushing up yields further.

“It’s another alarming unintended consequence of the mini Budget. While it shouldn’t worry pension savers unduly, it does show how economic shockwaves can damage financial stability of many parts of the market that sit behind the financial products and services we all rely on.”

It is also a stark U-turn for the Bank which five days ago said it would start selling off debt that it had accumulated during the pandemic and financial crisis.

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