(May 22, 2012) — The International Monetary Fund (IMF) has asked the United Kingdom to consider a further wave of Quantitative Easing (QE) to help to continue stabilising the economy, as institutional investors struggle with negative real yields and burgeoning deficits.
QE, the process of issuing government debt only for it to be bought back by the Bank of England, has helped liquidity in the financial sector but has been vilified by some due to it pushing down the yields on these bonds. Gilts are a staple for most pension funds in the UK as they are used to measure liabilities and are yielding far less than inflation, which was reported today at 3%.
Today, in the IMF’s Article IV Consultation Concluding Statement of the Mission on the UK economy, it stated: “Anaemic nominal wage growth and broadly stable inflation expectations suggest underlying inflationary pressure is weak, providing space for greater monetary easing.”
The statement continued: “Evidence suggests that QE can continue to support demand by lowering long-term interest rates and improving banks’ liquidity.”
However, some in the pensions industry have warned this could prove even more harmful than the previous QE actions.
Joanne Segars, Chief Executive of the National Association of Pension Funds (NAPF), said: “If there is to be more QE then the government needs to do more thinking about the impact on pension funds. QE has driven pension funds further into the red and leaves those trying to buy an annuity with a worse deal, which they are then locked into for life.”
Last year, de-risking specialist Pension Corporation’s Co-Head of Asset-Liability Management Mark Gull said QE had carried out a ‘double whammy’ on pension funds.
By September, Gull estimated that the first round of QE had wiped increased funding deficits owned by UK pension funds by £74 billion and as most companies operating these funds were not large enough to tap capital markets, they could not take advantage of low interest rates on offer.
Segars at the NAPF said: “We are being told it will all be worth it in the long-run, but in the short-run pension funds and pensioners are being left to deal with the pain. They need, and deserve, much more support.”
In its report, the IMF praised the UK government’s actions to so far stabilise the country’s economy and help build the financial sector – one of its major revenue drivers – and started to reduce its deficit. However, the IMF criticised that as a result of this action the overall growth had been flat and it added that this performance was likely to remain in a similar state until at least the end of the year, despite the country’s recovery looking set to speed up.