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The market turmoil that has occurred since last Friday’s budget announcement has exposed vulnerabilities within the UK pensions sector, an authority has said. 

Alice Haine, personal finance analyst at DIY investing and training service Bestinvest, said: “The sharp fall in the worth of the pound and rise within the yields on UK Government bonds within the wake of Chancellor Kwasi Kwarteng’s dramatic tax-cutting fiscal plan, set to be funded by Government borrowing, has also exposed vulnerabilities within the UK’s pension sector.

She added that The Bank of England’s decision to step in on Wednesday “shows just how serious the issue is”.

Ms Haine said: “The extraordinary intervention got here amid growing concern that defined profit (DB) pension funds, those where employers are committed to paying retired staff an income linked to their final salary, were susceptible to being hammered by the plunge in the worth of the pound and sharp moves within the long-term gilts market.”

She continued: “Defined profit pension schemes need to make sure they’ve enough assets to cover their future money flow liabilities far into the longer term, which is effectively the price of paying out pension to their retirees.

“Major changes in long-term rate of interest expectations in recent days as borrowing costs have risen have due to this fact triggered some schemes to demand injections of additional money to make up potential shortfalls.

“With the Bank of England now buying more long-term gilts over the following two weeks, it’s hoped it will stabilise the market, however it is effectively switching the central bank’s strategy back to quantitative easing – where it buys bonds and in return injects latest money into the economy – on the very point it desired to give attention to QT – quantitative tightening.

“Nevertheless, the impact of bond market movements on DB pensions is a problem for schemes to deal with, as ultimately the danger sits on the shoulders of employers, not members.

“Today most individuals enrolled right into a workplace pension might be in an outlined contribution (DC) scheme, where the longer term value of their pension might be determined solely by what they put in and market performance, and never their final salary.

“Pension fund values will even have been impacted by wider turmoil in global financial markets in recent weeks.

“While the entire attention in recent days has been on the pound and UK gilts, people should do not forget that is ready against a backdrop of world volatility.”

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