Personal Pension  

QE could force pension sponsors into £250bn top-ups

Further quantitative easing could force companies sponsoring defined-benefit pension schemes to pay an additional £250bn over the next 10 years, according to a report.

Published by pension consultancy Fathom Consulting and DB scheme insurer Pension Insurance Corporation, the report sets out a range of outcomes for scheme funding by considering three alternative scenarios for inflation and for index-linked yields in the UK.

According to the report, index-linked yields are a main driver of the funding position of most pension schemes, which in turn means they influence the level of contributions required from scheme sponsors.

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In the worst-case scenario presented within the report, the Bank of England’s Monetary Policy Committee increases its asset purchase facility to counter the effects of tapering by the US Federal Reserve in an effort to keep index-linked yields below zero.

In the most optimistic scenario the recent pick-up in growth is maintained and the presence of spare capacity in the UK economy limits inflation. Here there could be a “rapid normalisation” of yields meaning the typical scheme could be fully funded within a few years.

In the third scenario, labelled ‘supply pessimists’, there has been lasting damage to UK productive potential and the pick-up in demand feeds through to higher inflation. In spite of the increase in inflation, the MPC takes no action. Yields begin to drift higher, but the normalisation process takes longer.

Danny Gabay, director at Fathom Consulting, said: “Because they are under-hedged, DB pension schemes are particularly vulnerable to unexpected increases in inflation.

So contributions from scheme sponsors depend in large part on the outlook for inflation, how the Bank of England reacts to this, and how market rates respond to both.”

Mark Gull, co-head of asset and liability management at PIC said, “Defined benefit pension schemes and their sponsors have been one of the main losers from recent monetary policy. Huge sums have been paid out by UK corporates in an effort to close pension deficits, with very little to show for it.

“This is money that could have been productively invested in jobs and developing business. Yet, as the scenarios we set out show, sponsors still face the risk that they could be on the hook for an additional £250bn in aggregate.”