Pension schemes warn of QE2 Titanic disaster

6th October 2011

Speaking to trade site, Professional Pensions Saga director general Ros Altmann argues: "More quantitative easing will worsen inflation and lower long-term interest rates, which will worsen pension fund deficits and lower consumer confidence, thus actually damaging, rather than stimulating sustainable growth."

Examining the issue a few days ago, the e-financial news writes that one pension firm, the Pension Investment Corporation calculated that the last round of QE cost pension schemes around £74bn after considering equity gains.

Aon Hewitt estimates that since the start of this year, the total pension liability in the FTSE 100 has leapt from £613bn to £730bn on the strictest actuarial metrics as a result of quantitative easing depressing long-dated gilt yields, further adding to the gloom for the sector.

The National Association of Pension Funds has asked for an emergency meeting the Pension Regulator to discuss the implications for UK schemes as reported here in Money Marketing. Chief executive Joanne Segars said: "Lower interest rates will increase pension deficits, making them look artificially large. This is even more worrying as the Bank of England is intending to extend its gilt purchases into longer term maturities, which will have a larger impact on pension fund deficits."  

The Economist's Buttonwood columnist thinks that rather than boost growth QE2 could actually reduce it by hitting companies with big pension scheme deficits hard.  

"Policies that force down bond yields have the effect of driving up pension liabilities. Step forward our old friend QE. According to the Pension Corporation, the effect of QE on British corporate pension schemes has been to widen deficits by £74 billion. Since such deficits tend to be closed over a 10 year period, that means companies need to put a further £7.4 billion into their schemes every year. That is money that should have gone into expanding factories and hiring new workers."

Buttonwood also believes it might also encourage individual pension savers to put more money away which hardly bolsters demand.

"Indeed, if you are a rational worker saving for retirement in a DC scheme, you should be saving more, not less. Thanks to the low interest rate policy (and QE), it will take more effort to build up your required lump sum. And that lump sum will have grown because yields will have fallen. If annuity rates have dropped from 7% to 5%, generating a $20,000 income will require $400,000 as opposed to $280,000. This is not an obvious way of boosting demand," he continues.

Conservative right winger John Redwood has also attacked the move once again honing in on what it does to living standards. He writes: "The MPC's interest rate strategy has cut the living standards of the prudent by slashing interest rates on savings. It has cut the value of everyone's income, owing to the inflation. It allows the government to borrow at very low rates at the expense of everyone else. Small and medium sized enterprises and individuals do not borrow at anything like the low interest rates we hear about as the MPC's great success.

"If they print more there is a danger of a weaker pound and more price rises. If they keep interest rates low they continue to punish the saver. The MPC follows a policy of public sector good, private sector bad. Their policy is not supporting the idea of a private sector led recovery. We need more cash and credit in the private sector, and more success in curbing inflation."

It looks like the Bank of England won't be on the pension industry's Christmas list.

But it is not just the pension industry that has criticised the move. Some in the mortgage industry have voiced concerns about the impact of the rising cost of living on those saving for a deposit.

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