Next round of quantitative easing to add to pension woes

The announcement of a second £75 billion round of quantitative easing (QE2) by the Bank of England has put further pressure on pension funds, as it is expected to depress gilt yields and increase pension liabilities at a time of economic weakness.

National Association of Pension Funds (NAPF) chief executive Joanne Segars has called for an urgent meeting with the Pensions Regulator to discuss ways of protecting UK pensions from the negative effects of quantitative easing. Segars said: “A strong and growing economy is essential for the long-term sustainability of UK pensions. QE is a price worth paying, but only if it is successful in delivering the growth that businesses and pension funds need.”

However, she added that QE makes is more expensive to provide pensions and will weaken scheme funding, due to the effect of lower interest rates on pension scheme deficits. She said: “It is crucial that the Pensions Regulator takes into account the negative impact of quantitative easing on pension schemes. 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.

Speaking at the NAPF annual conference, outgoing NAPF chairman Lindsay Tomlinson called for the Pensions Regulator to extend recovery period, smooth valuation results and postpone valuation dates to help schemes. Tomlinson commented: “Pension funds want to see a strong economy, so we understand the thinking behind the latest tranche of QE, but this is a strong medicine with some nasty side-effects. QE is a key ingredient in a recipe that is destroying the value of the UK’s retirement savings. It’s a torture for pension funds because it artificially suppresses long-term interest rates.”

Under the triennial valuation system, schemes are about to see their next valuations distorted by QE in what Tomlinson described as a valuations lottery. Initial NAPF estimates suggest that the latest round of QE will add £55 billion to pension fund liabilities and £10 billion to assets, adding £45 billion to overall deficits.

Russell Investments head of consulting and advisory services, Sorca Kelly-Scholte, said that QE2 would reduce the supply of gilts could scare the bond markets, regardless of QE2. Fidelity portfolio manager Ian Spreadbury said: “I’m nervous that at some point investors may question the British government’s ability to manage their finances. In response to this risk, I have begun to reduce my duration position”. And Baring Asset Management head of fixed income and currency, Alan Wilde, said: “It is only a matter of time before international investors realise that the problems of the Eurozone are alive and well in the UK. Once the hot money parked in sterling and the gilt market takes flight, both sterling and the gilt market are likely to see very significant weakness, to the detriment of investors.”