Hannah Brenton takes a look at the bitter argument on the impact of QE on pensions.
You cannot deny the pensions industry has been anything but consistent on quantitative easing. It has been labelled a “catastrophe”, criticised for “wreaking havoc” with scheme funding and decried for causing “collateral damage” to pension schemes since the Bank of England first began buying billions of pounds worth of gilts in March 2009. For many, QE has exacerbated the decline of defined benefit pensions by depressing gilt yields and inflating deficits.
On the other hand, the Bank of England has denied QE’s negative impact on schemes in the UK. Earlier this year, governor Mervyn King told the Lords Economic Affairs select committee that the demise of DB pre-dated QE and “cannot be laid at its door”.
Since then MPs on the Treasury select committee have pushed the Bank to explain the costs and benefits of its policy actions to groups who are perceived to have lost out.
In August the Bank produced a report titled The distributional effects of asset purchases, which explicitly defends the impact of QE on savers and pensioners and attempts to lay to rest some of the industry’s concerns.
From the horse’s mouth
The report argues that without the Bank’s asset purchases, almost entirely of gilts, “most people in the UK would have been worse off”. It says growth would have been lower, unemployment higher, and many more companies would have gone out of business. It argues this would have been detrimental for just about everybody, including pensioners and savers.
The Bank admits QE has caused the price of gilts to rise and yields to fall, but it argues that this in turn has led to demand for other assets, pushing up the prices of corporate bonds and equities. “In fact, the Bank’s assessment is that asset purchases have pushed up the price of equities by at least as much as they have pushed up the price of gilts,” the report claims.
It argues that for a fully-funded DB scheme, QE will have had a “broadly neutral” impact because although the fall in gilt yields will have increased liabilities, the increase in the price of bonds and equities will have raised the value of assets.
But the UK’s monetary body admits that for a DB scheme with a substantial deficit, QE is “likely to have increased the size of the deficit”.
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