By way of context, gilts are government bonds that are widely regarded as a low-risk form of investment. Due to their low risk, pension funds tend to be big holders of gilts to guarantee pay-outs to retirees over many decades. 

On 23 September 2022, the former Chancellor set out a range of measures in his Growth Plan to support economic growth and encourage investment. Although these were the right aims, the proposed means of achieving them made pension funds concerned about how much the Government would need to borrow in the short to medium term. 

The funds were concerned that the Government would be unable to pay back the money it owed them in gilt repayments, and that the loans would be worth less in real terms when they were repaid as a result of inflation. 

Consequently, pension funds became unwilling to buy gilts for as much as investors had previously paid, and the Government had to pay higher yields (interest rates) to persuade investors to buy new gilts.

As well as buying gilts, some pension funds use them as guarantees – or ‘hedging’ policies – to enable them to borrow money from banks to pay for retirees’ pensions: pension funds sell the gilts to repay the banks.

But when the value of gilts fell after 23 September, pension funds had to sell a greater number of them to raise the same amount of money needed to repay banks. With more gilts being sold, their value fell further, which risked a downward spiral that could have left some pension funds unable to pay their debts.

On 28 September, the Bank of England, in pursuit of its statutory objective of financial stability, stepped in and purchased large quantities of gilts to inflate their price and support pension funds. These operations have enabled a significant increase in the resilience of the sector and were terminated on 14 October.

I am pleased that, following Chancellor Jeremy Hunt’s financial statement on 17 October 2022 and the appointment of Prime Minister Rishi Sunak, following a leadership election, on 25 October 2022, gilt yields returned to levels last seen before the announcement of September’s Growth Plan. Indeed, in early July, gilt yields increased to 5.668%- the highest level since 2007.

What the Bank of England's intervention means for specific pension funds’ portfolios in the longer term will be determined by the number of gilts held by those funds and future market conditions.