£50bn QE3 to prolong scheme funding torture for further 12 months

The Bank of England’s move to increase quantitative easing by £50bn will prolong low gilt yields for a further 12 months, adding further strains on pension funding positions, experts say.

The BoE today announced its intention to up its asset purchase programme by £50bn to £325bn to boost economic growth - but the move will put further pressure on scheme funding levels over the next year as yields look set to remain at 2%.

Hymans Robertson partner Clive Fortes said: "For pension schemes in search of stable yields, that is not good news.

"Having said this, we expect that this third dose of medicine will have considerably less impact than the first or second dose. What we do expect, however, is that QE3 will extend the period before we might see gilt yields rising to even the levels seen 12 months ago."

Fortes added companies and trustees should reassess their funding and investment strategies in light of the injection of funds.

Aon Hewitt global head of asset allocation Colin Robertson said: "Sadly, an unintended consequence to this approach to boosting economic growth is that it will exacerbate pension funding problems in the UK. Larger pension deficits put greater pressure on employers, with implications for employment, capital expenditure and therefore the broader economy."

The BoE will divide the £50bn into three segments: purchasing three year - seven year, seven year -15 year and over 15 year every Monday, Tuesdays and Wednesday.

National Association of Pension Funds chief executive Joanne Segars said: "Our priority has to be a stronger economy, so we understand the Bank's case for more medicine. But this short-term stimulus is leaving pensioners and pension funds in long-term pain.

"For the companies that run final salary pensions, QE is a headache which pushes their pension funds further into the red. This means businesses have to put more money into their pension schemes, instead of spending it on jobs and investment. Our fear is that firms struggling with a weak economy will simply choose to close their pension schemes."

Kames Capital head of international rates John McNeill said: "The Bank of England has decided to maintain bank rate at 0.5% but the committee voted to increase the programme of asset purchases by a further £50bn, taking the total to £325bn.

"Despite the recent improvement in the economic data, the bank has judged that further monetary easing is required to ensure that the inflation target is met at the two-year horizon."