UK - Pension funds would suffer from liabilities increasing further if the Bank of England buys gilts in another round of quantitative easing, Pension Corporation says.
The pension scheme de-risking specialist said purchasing more gilts would have "the biggest impact on scheme deficits" because it pushes down gilt yields and increases scheme liabilities.
Pension Corporation co-head of asset liability management Mark Gull said the first round of quantitative easing - in which some £200bn of gilts were bought by the Bank of England - was bad for UK pension funds and insurers because it increased scheme liabilities by about £74bn.
He said if the BoE does engage in another round of QE it should avoid gilts and it was "worrying" a recent BoE paper did not mention the asset allocation impacts of QE on pension funds as they are among the biggest holders of gilts.
Gull said the situation is exacerbated by The Pensions Regulator's ten-year funding plan which, given the increase in liabilities to £74bn, equates to sponsors pumping approximately £7.4bn into schemes each year.
This money is likely to go into gilt market assets to help schemes de-risk, which is in turn pushing down yields and actually increasing deficits, he said.
Gull also urged BoE not to buy non-financial corporate bonds, which it also did during the last round of QE. Instead it should target the stressed area of the UK economy by buying stressed assets off bank balance sheets, or bank bonds.
He said this would allow banks to be more certain of their asset values and thus make it easier for them to lend - and a short-dated yield curve would help rebuild balance sheets.
"Do not buy non-financial corporate bonds," he said. "Look at the areas that are stressed and need help. The stress is still in the financial system."
However, Gull conceded there could be political dimension to the UK government being seen to bail out the banks again, but added we need a strong financial system and "we need that lending channel".
Pension Corporation co-head of business origination Jay Shah said pension schemes do not react instantly to financial changes, because they undergo triennial valuations, so the effect of QE is likely to filter through in a number of years.
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