Former pensions minister Baroness Ros Altmann has said there is further pain for UK pensions as quantitative easing worsens deficits and increases annuity costs.
Former pensions minister Baroness Ros Altmann has said there is further pain for UK pensions as quantitative easing worsens deficits and increases annuity costs.
Yesterday (4 August) the Bank of England cut rates by 25 basis points and unveiled a package of stimulus measures designed to prevent the economy from falling victim to a Brexit-related slowdown.
It restarted its quantitative easing programme and will purchase an additional £60bn in gilts, as well as up to £10bn in corporate bonds over the next 18 months. It will also introduce a new term funding scheme, worth up to £100bn, to encourage more bank lending.
Aegon pensions director Steven Cameron said now is probably the “worst time ever” to consider buying an annuity.
It also spells more bad news for chronically under-funded defined benefit schemes, particularly those that have not put hedging strategies in place, as there will be more downward pressure on gilt yields, pension consultants have said.
Following the Bank’s announcement, Baroness Altmann said the cost of pensions, whether defined benefit or defined contribution, will now rise as gilt yields fall due to the quantitative easing, hitting annuity rates.
Rises in asset prices don’t offset rise in the liabilities so pension deficits worsen, she added.
“The sensitivity analysis shows that for every one percentage point fall in long gilt yields there will be an increase in the average pension fund’s liabilities of 20 per cent, while its asset values will only increase by around 7-10 per cent.”
Baroness Altmann added deficits are approaching £1trn, with Hymans Robertson estimating that deficits of UK final salary schemes post-Brexit has risen to £935bn.
“A further fall in interest rates as a result of today’s Bank of England announcement will see this figure increase further towards the £1trn mark. The value of liabilities, as measured at today’s interest rates, is well over £2trn.”
She added this damaging side-effect of monetary policy means bigger burdens on UK employers and already struggling with rising deficits to support their pension schemes. The more money they put into the pension scheme, the less they can spend on supporting their buinsses.
“This undermines the aims of QE which is meant to stimulate the economy as this supposedly expansionary policy weakens the ability of the employer to grow its business. So monetary policy that is meant to boost growth has a damaging side-effect that can undermine companies.
“Ultimately, more employers may fail as pension deficits balloon. That would mean pension scheme members enter the PPF and their benefits are not paid in full.”
Additionally, Baroness Altmann noted that derisking becomes a “vicious circle” that ultimately increases risk of failure.
“Trying to ‘derisk’ generally means buying gilts (or other high quality bonds or hedging), since these are supposed to better match the performance of the schemes’ liabilities.
“As liabilities are calculated with reference to gilt yields (conventional actuarial basis) or AA corporate bond yields (accounting measure), gilts and bonds are considered the assets that will best match the liabilities.
“But buying more gilts or bonds will, at the margin, force yields down further, especially in light of further QE (buying £50bn of gilts and £10bn of corporate bonds). Trustees will be competing with the Bank of England for scarce assets and pushing yields even lower and their schemes’ deficits will keep rising - a classic vicious circle.”
ruth.gillbe@ft.com
