BoE: No evidence QE damages businesses with DB schemes
Further quantitative easing (QE) and cutting interest rates to 0.25% have not hurt businesses with defined benefit (DB) schemes, according to the Bank of England (BoE).
The comments were made on 17 October as the Work and Pensions Committee (WPC) grilled deputy governor for monetary policy Dr Ben Broadbent (pictured) as part of its inquiry into DB regulation.
The senior central bank figure added its primary concern is the effect of its policies on the spending decisions by companies, rather than the position of DB schemes themselves.
The bank has come under fire for launching an extra £70bn QE programme in August following the Brexit vote. This involves the bank buying £60bn of gilts, including long-dated gilts, thereby causing a rapid reduction in yields over the summer.
This contributed to a substantial increase in the aggregate funding deficit of the Pension Protection Fund's 7800 index over August, although it improved over September as yields rose.
However, Broadbent said there was no evidence to suggest its policies were creating hardship for DB sponsoring employers, based on the BoE's own monitoring.
He said: "When it comes to pension funds and QE, we think about these things very carefully. We are concerned about the possibility - if QE increases the deficit of some pension funds - if that acts as a financial constraint on companies and affects their investments.
"We look at that closely. Broadly speaking, we can't find much evidence that that effect exists. We do a lot of work ahead of these decisions to make sure we are not causing a material effect.
"We can't find much evidence that the cost of capital has gone up more for companies with pension deficits."
However, Broadbent admitted schemes already in deficit may have seen their funding situations worsened.
He said: "The effect of QE is to raise the value of bonds but also raise the prices of assets. Once we take both into account, the impact of the difference between those two is not that big [for balanced pension funds]... but it does have a big effect on funds already in deficit."
The deputy governor also attacked low-risk investment strategies, arguing scheme assets were not growing as quickly as liabilities due to a mix of an aging membership and low-yielding assets.
He said: "The problem for funds has been the price of assets has failed to keep ahead. Regulation is actually pushing these funds to the low-yielding risk-free assets."
The session was the second of five WPC oral hearings. On 12 October, it was told The Pensions Regulator (TPR) needs more resources rather than powers, and any attempt to modify pensions legislation should be made sooner rather than later.
In written evidence to the inquiry, TPR and the Pension Protection Fund also called for the watchdog to be more interventionist and punitive.
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