An Alternative QE3?

(May 25, 2012)  —  An alternative to the mooted third round of Quantitative Easing (QE) in the United Kingdom has been proposed that could reverse some of the damage inflicted on the country’s pension funds.

An Asset Sale and Purchase Programme (ASAPP) has been suggested by Pension Corporation, a liability insurer and risk manager, that would help shore up banks’ balance sheets while offering investment opportunities to long-term investors, such as pension funds.

The concept involves banks selling loans they currently hold on their balance sheet to pension funds, which could benefit both parties, the company has claimed. Pension funds have been hit by rising liabilities due to falling gilt yields, against which they are measured, that have been the result of the current form of QE.

Pension Corporation estimated that every one basis point gilt yield drop increases defined benefit deficits in the UK by £2 billion (assuming no other asset price moves).  Yields on 10 year gilts are around historic lows.

Under ASAPP, loans would be sold by banks at par and then purchased by pension funds at the real, lower market value. Banks are trapped into valuing these loans at par, Pension Corporation said, which could be up to 20% greater than the real market value.

Mark Gull, Co-Head of Asset-Liability Management at Pension Corporation, said: “Pension funds have long-dated liabilities and should be encouraged to go into long-dated investments. Instead of pension funds being collateral damage in the race to shore up the economy, policy should utilise them in a growth oriented solution.”

Gull said that the move could also help banks meet their capital requirements under the incoming Basel III legislation and provide a boost to the economy at large.

“Policy should instead focus on freeing up the banks to lend and where possible easing the burden on companies by bringing down pension fund liabilities. ASAPP avoids the policy error of pushing real yields even lower, so compounding financial repression and increasing the pressure on corporate sponsors. It should also be recognised that the banks themselves are the best credit easing facility we have and therefore the best hope of spurring economic growth.”