Bank admits some pensions ‘adversely affected’ by QE
Defined benefit pension schemes in substantial deficit have been adversly affected by the Bank of England’s asset purchase programme, otherwise known as quantitative easing, as asset purchases are likely to have increased the size of the deficit, the Bank has admitted in a new report.
In a paper published today (23 August), the Bank says this is because although QE raised the value of the assets and liabilities by a similar proportion, that nonetheless implies a widening in the gap between the two.
By contrast for a typical fully-funded DB pension scheme, asset purchases are likely to have had a broadly neutral impact on the net value of the scheme, the Bank adds.
The paper claims claiming that the fall in gilt yields raised the value of the pension fund’s liabilities, while the associated increase in bond and equity prices raised the value of their assets by a similar amount.
Likewise, asset purchases are likely to have had a broadly neutral impact on the value of the annuity income that could be purchased with a personal pension pot.
However, the paper admits that the fall in gilt yields reduced the annuity rate. The Bank claims this was offset by the rise in the value of equities and bonds held in the fund.
Furthermore, the pension income of those already in receipt of a pension before asset purchases began has not been affected by QE and the same is true for the retirement incomes of people coming up to retirement in a DB pension scheme, the Bank asserts.
The main factor affecting the valuation of DB pension schemes and DC pension pots over the past five years has been the fall in equity prices relative to gilt prices, the paper continues.
That fall in the relative price of equities was not caused by QE and stemmed in large part from the reluctance of investors to hold risky assets, such as equities, given the deterioration in the economic outlook, almost certainly as a result of the financial crisis.
The paper flags up that although there has been several individuals who have been adversely affected, it is likely that without loosening the monetary policy, the economic downturn “would have been far more severe”, to the detriment of almost everyone in the economy, including savers and pensioners.
The report forms part of the Bank’s response to a request by the Treasury Committee for the Bank to explain the costs and benefits of its policy actions, in particular to groups that are perceived to have been negatively affected.