8th March 2012
The NAPF states its case here: "The National Association of Pension Funds (NAPF) said the Bank of England's printing of £125bn within the past six months had hit pension funds harder than expected – and will force businesses to divert money away from jobs and investment and into filling pension fund deficits.
"On the third anniversary since the start of QE, the NAPF called on the Pensions Regulator to change the way that pension fund liabilities are calculated, and to give pension funds more time to cover deficits. It also wants the Bank of England and the Regulator to make a joint statement explaining how the distortions caused by QE make pension deficits look artificially high."
The response to the NAPF's statement has drawn both opprobrium and sympathy. Coolman on the FT community boards – agrees that quantitative easing is not designed with the ‘little guy' in mind: "QE = aimed at rising asset prices. This is to protect the banks' balance sheets and allow to recover…Finally people are waking up to the fact that QE only really helps 5000 senior bankers in the city of London. It is like a secret bail out on top of the other secret bail out which is us underwriting all banks liability and allowing them to borrow super cheap."
mgb500 on Reuters goes one step further: "Well done Mervyn ‘The Hamster' King. Give the banks billions to sit on – you should know by now that they WON'T lend – just hoard the cash. At the same time – you have just given pensioners and those coming up to retirement, a kick in the balls! Congratulations! With friends like the BoE, who needs a full blown recession?!
However, there are those who argue that pension funds must take some responsibility for their own situation. Teddy D says: "The corporate sponsors should have been making contributions so that the pensions were not in an underfunded state. Further, if the pension was properly managed, i.e. duration matched, a decrease in rates would increase the size of the liabilities, but would be offset by an equal and opposite increase in the size of bond assets. Therefore I would surmise that they are finding a scapegoat in the BoE as they have not advised their pension clients correctly."
Certainly the NAPF statement has a number of flaws. Firstly, it implies that companies would be investing were it not for the fact that they had to manage their pension liabilities. UK companies weren't doing a lot of investing anyway. As Will Hutton says in this piece on the Guardian: "British companies are running a cash surplus of some 6% of GDP, again the largest in the world, but are refusing to spend that cash on investment or innovation, preferring to hoard it, preserve profit margins or buy back their own shares. Business investment as a share of GDP is thus the lowest among large industrialised countries."
Equally, the quantitative easing phenomenon is likely to be relatively short-lived. The yield on the 10-year gilt has moved from 1.98% at the start of this year to 2.17% at the moment. Relatively few investors see significant value in gilts and, barring a significant economic shock, yields may move out further. Indeed, some pension funds – those with the flexibility to do so – have been exiting UK government bonds. John Pattullo, head of retail fixed income at Henderson says: "Since QE began, the gilt holdings of typical gilt buyers (non-banks such as pension funds and insurers) have fallen. Given the Bank of England's large holding of gilts, questions remain with regards to inflation risk and what will happen when the economy turns around. For the coming year, we favour the lower end of investment grade and the better-rated high yield corporate bonds as we believe they offer much better value."
That said, there remain issues with the way pension liabilities are calculated and the NAPF is right to call on the pensions regulator to re-examine how these calculations can create distortions. There is a vast range of views on how this issue might be addressed. Some, such as John Redwood in this piece, have argued that investors need to look beyond gilts and embrace greater investment in equities. Others argue that this is not the answer: "Trustees must instead look to match their investment strategy with their liabilities and run them in parallel. Investments should be targeted that produce an income stream that is expected to match the cash outgo on pension benefits, without incurring the risk to sell them at a loss. Investments that seek speculative capital gains are just not consistent with a maturing pension fund's needs and risk profile. Pension funds need to invest recognizing the fact that they have to effectively back guarantees to their members."
Pension funds have undoubtedly been hit hard by quantitative easing and regulators need to re-examine how pension liabilities are calculated. The situation may improve as gilt yields rise but pension funds also need to look at their investment strategy. It may be yet another reason that companies are not investing, but its removal is unlikely to prompt a spending splurge on the part of UK plc.
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