Quantitative Easing Sinks Pension Funds

(March 8, 2012)  —  Quantitative Easing (QE), engaged to stabilise the United Kingdom’s economy, has wiped £90 billion off the value of its pension fund assets, the National Association of Pension Funds (NAPF) has told its annual investment conference and called for a change in accounting measures to help contain liabilities.

The Bank of England’s second round of purchasing gilts – which has taken the total to £125 billion – has forced down yields and pushed defined benefit pension funds further into the red, the NAPF announced at its annual conference in Edinburgh today.

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 allow pension funds more time to cover deficits.

Joanne Segars, Chief Executive of NAPF, said the organisation also wanted 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.

Segars said: “Businesses running final salary pensions are being clouted by QE. Deficits that were already big now look even bigger because of its artificial distortions.

“Firms are legally obliged to fill the deficits, and that diverts money away from jobs and investment, and will lead to further closures of final salary pensions in the private sector. Retirees trying to get a good annuity are feeling the pain too – they are getting a fifth less than they would before QE started.

“We need to see stronger action from the authorities on this massive issue, which will hurt pension schemes for some time yet. And there is always the possibility of QE3.”

Along with lowering the return earned on gilts, which are a staple in UK pension fund portfolios, lower yields also affects the way pension funds liabilities are measured. Lower gilt yields and long-term interest rates mean that pension funds are more expensive to fund, and so funds appear deeper in the red.

The NAPF said its members wanted the Pensions Regulator to extend the timeframe over which pension funds need to be able to clear their deficit. These recovery periods currently range from between 7.8 to 9.4 years. The NAPF believes they may need to be longer if pension deficits are artificially high due to low gilt yields.

Elsewhere, asset manager Standard Life Investments voiced concern about how QE would be withdrawn once the Bank of England decided the economy was stable enough to no longer need the support.

Andrew Milligan, Head of Global Strategy at Standard Life Investments, said: “There will be major risks when QE is halted or withdrawn. At some point, central banks could announce the end of QE, potentially causing a major sell-off in government bonds with much higher yields – akin to the bond crisis seen back in 1994.”

Milligan said a withdrawal could cause other difficulties too. He said: “Do central banks allow their stock of debt to mature or do they begin to sell back into the marketplace, exacerbating the effects of any interest rate changes? As the timing of QE announcements has periodically caused currencies to depreciate, then the timing of QE withdrawal will presumably have an impact on relative currency appreciation.”

The NAPF also calculated that the first wave of QE, which started in March 2009 and pushed gilt yields down by around 100 basis points, would have increased pension fund liabilities by around £180 billion.