QE3 piles more pain on pensions
The Bank of England’s decision to pump a further £50bn into the UK economy is predicted to lead to falling annuity rates and rising pension fund deficits.
Keeping interest rates at 0.5 per cent again this month, the Bank’s Monetary Policy Committee voted to increase the programme of asset purchases by a further £50bn, taking the total to £325bn.
The NAPF has warned that QE3 will push up deficits, causing even more employers to close defined benefit schemes after the last round of easing pushed up deficits by an estimated £45bn.
Joanne Segars, chief executive of the NAPF says: “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.
“Our fear is that firms struggling with a weak economy will simply choose to close their pension schemes.
“We think the last hit of QE increased pension fund deficits by around £45bn, and the latest tranche will only add to that bill. The Pensions Regulator needs to set out the details of how it is going to help pension funds cope with QE. Possibilities include extending recovery periods, smoothing valuation results, and postponing valuation dates.”
Colin Robertson, global head of asset allocation at Aon Hewitt, says: “The announcement of another programme of QE by the Bank of England forms part of a wider global suppression of bond yields - witness “Operation Twist” in the US and the ECB’s huge programme for the banking sector, much of which is inevitably recycled into Eurozone bond markets. Given the interaction of bond markets around the world, it is therefore impossible to isolate the impact of the Bank of England’s actions, but undoubtedly anticipation of this latest package of QE has acted to keep gilt yields at extremely low levels.
“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.”
Kames Capital head of international rates John McNeill says: “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.”
Clive Fortes, partner at Hymans Robertson says: “While QE might have beneficial impacts in terms of reducing the cost of Government borrowing and boosting money supply in the economy, the flip side of this is that the yields available from UK gilts have plummeted to levels not seen since the late 1800s. 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 1st or 2nd 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. We therefore think that companies will face a long slow process of restoring the funding position of their pension schemes. As a result, companies and trustees need to reassess their funding and investment strategies.”
Andrew Tully, pensions technical director, MGM Advantage commented: “The latest round of quantitative easing will further impact gilt yields and will therefore drive down annuity prices.”