Jonathan Stapleton looks at how the Bank of England's decision to increase its quantitative easing programme by £75bn will affect pension schemes
The Bank of England’s decision last week to increase its quantitative easing programme by £75bn was welcomed by many as a much needed boost to the UK’s ailing economy.
Yet, such a dramatic move is likely to have a substantial effect on UK pension funds – potentially increasing deficits and weakening the funding position of many schemes.
The National Association of Pension Funds is so concerned about a second round of QE it has called for an urgent meeting with The Pensions Regulator to discuss ways of protecting UK pension schemes from the negative effects of quantitative easing.
Chief executive Joanne Segars says: “Quantitative easing makes it more expensive for employers to provide pensions, and will weaken the funding of schemes as their deficits increase.
All this will put additional pressure on employers at a time when they are facing a bleak economic situation.”
She adds: “It is crucial that the regulator takes into account the negative impact of quantitative easing on pension schemes.
“Lower interest rates will increase pension deficits, making them look artificially large. This is even more worrying as the Bank of England is intending to extend its gilt purchases into longer-term maturities, which will have a larger impact on pension fund deficits.”
A spokesman for The Pensions Regulator explains the watchdog is “happy” to discuss these matters with the NAPF – but adds there is already some help in place.
He says: “It’s worth remembering there is flexibility within the scheme funding framework. For instance, if a scheme’s valuation date falls within difficult economic conditions the system provides flexibility in terms of both the form and duration of deficit recovery plans to meet long-term liabilities.”
Actuaries agree with the NAPF – noting there could be “major unintended consequence of this action” as QE2 would depress bond yields and exacerbate funding problems.
Aon Hewitt global head of asset allocation Colin Robertson explains: “Already under stress from historic lows in gilt yields, the UK’s pension funds would undoubtedly find that, by depressing yields even further, QE2 only exacerbates pension funding problems. This stands to place even more of a burden on UK companies already buckling under the weight of the pension promise, with implications for employment and hence the economy.”
J.P. Morgan Asset Management European strategy group head Paul Sweeting agrees: “QE will lower gilt yields, and also spreads if the market believes this move will stimulate the economy. Combined, these factors could cause a significant rise in the value of pension plan liabilities.”
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