BoE slams pension industry’s QE criticism
Quantitative easing does not inherently raise pension deficits, BoE deputy governor for monetary policy argues.
Commentary regarding the effects of quantitative easing on pension funds has been “exaggerated” and “distracting”, the Bank of England has said.
In a speech to the National Association of Pension Funds’ Local Authority Conference, Charlie Bean, BoE deputy governor for monetary policy, estimated the path followed by pensions schemes in deficit would have been broadly the same if the MPC had not undertaken any QE, although gilt yields would have been higher and equities lower.
However, because the average pension fund deficit was about 30 per cent of total liabilities, Mr Bean estimated that in such circumstances “QE widens the deficit from the start of our purchases in early 2009 onwards, and by the end of the period has raised it by about 10 per cent of initial liabilities”.
He draws two conclusions: “The first is that while the change in the deficit is certainly not trivial for a substantially underfunded scheme, the impact of QE is nevertheless small compared to the movement in the deficit associated with other factors, such as the collapse in equity prices as a result of the financial crisis and the recession. In particular, it would be an error to attribute the deterioration in pension deficits since the start of the crisis solely to the impact of QE.”
“The second observation is that QE does not inherently raise pension deficits. It all depends on the initial position of the fund...if a fund starts off relatively “asset poor”, the sponsors will now find it more costly to acquire the assets necessary to match its future obligations.”
He finished by adding: “It may be tempting to conclude that the current abnormally low yields are primarily a consequence of QE, and that the right approach is just to look through the associated rise in deficits, but pension funds and their sponsors may have to contend with low yields for some considerable time yet.”
Ros Altmann, director general of Saga Group, is one critic of quantitative easing. She argues that it has been a “disaster” for anyone recently or soon-to-be retired and who doesn’t have a final salary-type pension.
She said: ““Instead of the individuals themselves, the employers are picking up the extra costs of pensions that have resulted from QE gilt-buying.
“Bank of England gilt purchases have driven down yields, and each one percentage point fall in gilt yields adds around 20 per cent to pension liabilities. Since 2008, gilt yields have fallen by 2.5 per cent, which means liabilities have risen by half - and assets have certainly not risen by anything like that amount.
“Therefore, QE has caused final salary scheme deficits to rise sharply, forcing firms to invest in their pension funds, not their businesses, which weakens growth - and indeed some companies have been forced into insolvency due to their pension deficits. These impacts have already damaged growth.”