6th November 2015
Pension funds have warned that quantitative easing (QE) could lead to poor returns, doing ‘permanent damage’ to investors’ savings.
A report from Create Research and Amundi said QE means pensions plans have had to find new ways to create returns for savers and this ‘increasing personalisation of risk’ could be causing ‘permanent damage’ to retirement prospects.
Although it said QE helped stop the financial crisis of 2008 turning into a 1929-style depression, long-term pension investors have been affected. A survey of pension plans showed 65% believe QE had acted as an opaque tax on investors and 64% said it had ‘forced an artificial convergence in the asset allocation of pension plans’ with ‘fear over relative under-performance inducing pension plans to herd around average returns’.
The ultra-low yields offered on less risky assets like bonds also mean investors have been forced into riskier assets giving rise to ‘crowded trades, correlated mistakes, stretched valuations and price insensitivity’.
However, unwinding the damage done by QE will not be easy and ‘the longer QE lasts the more difficult it is to predict the risk-returns features of different asset classes, their inter-correlations and their diversification potential’.
Professor Amin Rajan of Create Research said: ‘Governments in developed and developing economies are relying on ultra-low rates to make their debt more manageable and rising inflation to vaporise it.
‘QE is forcing investors to move up the risk curve, while retirees are increasingly obliged to bear the brunt of all risks themselves. Pension plans are rightly worried about the implications of this shift in responsibility.’
Pascal Blanque, chief investment officer at Amunid, added that the ‘full effects of QE remain unknown’ and pension funds ‘must not only adapt their investment strategies but also engage with plan members to raise awareness’.