Altmann gives damning assessment of QE impact on pensions

Altmann gives damning assessment of QE impact on pensions

In a hard hitting speech to the Economic Research Council against the continuation of quantitative easing, Baroness Ros Altmann said the potential negative impacts of QE have been significantly underestimated.

In particular, QE has made older and wealthier families better off, damaged defined benefit pensions and led to the extinction of private sector schemes, she said.

“For each one percentage point fall in long rates for an average duration pension fund, the liabilities will rise by 20 per cent.

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"But the same one percentage point fall in long rates is expected to increase asset prices by only 6-10 per cent, opening up the deficit which is currently a total of £500bn for UK pension funds.

“Billions of pounds of deficit financing contribution funds has gone into these schemes. Yet the deficits have still go up and the more QE keeps long rates down, the more the deficits have been rising, causing a vicious spiral,”  Baroness Altmann said.

"On top of this, annuity rates are priced relative to gilt yields and therefore have significantly worsened since QE. Employers who want to get rid of their pension risk, as so many will do, must buy annuities, but they have found these buy-ins or buy-outs have become so expensive that they can’t do that either."

Baroness Altmann, who has previously served as pension minister in David Cameron's government, said that defined contribution pensioners who buy an annuity after QE are locking in permanently lower life incomes.

She suggested an offset for DC savers is the degree to which they have been invested in assets that have increased in value following QE, but that this depends on the timing of the point at which they annuitise and what assets they have invested in.

Baroness Almann quoted figures saying that 85 per cent of defined benefit schemes have now closed.

"The deficit problem is also driving a number of small employers and charities into insolvency. This real impact on the economy is not being recognised. The consequence of QE is that the pension deficit problem is trying to turn non-financial employers into annuity providers," she said.

"That is the only way currently that the law will allow them to extricate themselves from the pension risk on their balance sheets. Buying annuities effectively means they are paying for the next 50 years’ worth of pensions upfront today. Even if it is affordable, is that sensible use of corporate resources and what are the possibly unintended consequences of this?" 

She pointed out that the bigger the deficit the more pressure on pension schemes to ‘derisk’ and switch to assets which are supposed to match their liabilities, such as long bonds whose yields have already fallen.

This switch gives less chance of outperforming.

"This merry-go-round means schemes have been selling their potentially higher-return assets in the supposed quest to reduce risk, however the ultimate impact may be locking-in that deficit, rather than outperforming it," she said.