Aon Hewitt Predicts 'Major Unintended Consequences' for Pensions Following UK's QE2

(October 6, 2011) — The Bank of England has unleashed £75 billion of emergency funding in order to aid in recovery of the UK’s economy while protecting Britain’s economy from the euro zone debt crisis.

In a move dubbed QE2, the UK’s Monetary Policy Committee (MPC) voted to boost the Bank’s quantitative easing (QE) program from £200 billion to £275 billion while holding interest rates at 0.5%.

“The pace of global expansion has slackened, especially in the United Kingdom’s main export markets,” the Bank said in a news release. “Vulnerabilities associated with the indebtedness of some euro-area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally. These tensions in the world economy threaten the UK recovery.”

In response to the Bank of England launching QE2, Colin Robertson, Global Head of Asset Allocation at Aon Hewitt, revealed a negative outlook for pension funds, telling aiCIO: 

“While it is understandable that the Bank of England has opted for a second round of Quantitative Easing in the context of other measures available, there will be a major unintended consequence of this action.”

He continued: “Already under stress from historic lows in gilt yields, the UK’s pension funds would undoubtedly find that, by depressing yields even further, QE2 only exacerbates pension funding problems. This stands to place even more of a burden on UK companies already buckling under the weight of the pension promise, with implications for employment and hence the economy.”

Mohamed El-Erian, CEO and co-CIO of the Pacific Investment Management Co. (PIMCO), made similarly negative predictions about the implementation of QE2 in the US. In March, El-Erian asserted that the cost of the Federal Reserve’s actions was starting to outweigh the benefits. In an interview with CNBC, El-Erian said the central bank should calculate how it can exit from its multi-trillion dollar QE2 program. Federal Reserve Bank of St. Louis President James Bullard has said the central bank is “determined” to get monetary policy back to normal, confirming that policymakers could subtly adjust its plan by backing off early from QE2.