Falling gilt yields have pushed final salary pension funds £90bn deeper into the red since the second wave of quantitative easing (QE) started last October, pension experts said today.
The National Association of Pension Funds (NAPF) said the Bank of England’s printing of £125bn within the past six months had hit pension funds harder than expected - and will force businesses to divert money away from jobs and investment and into filling pension fund deficits.
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 give pension funds more time to cover deficits.
It also wants 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.
Joanne Segars, NAPF Chief Executive, 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.
“Pension funds want a stronger economy, so they are on board with the QE project for now. But the latest bout of £125bn of money printing has blown a £90bn hole in their side. We need help in managing that. Pension funds cannot be left holding the baby.
“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.”
QE affects defined benefit ‘final salary’ pension schemes because the Bank’s buying of debt pushes up the price of Government gilts. This creates lower returns, or yields, on pension funds’ new investments in gilts, and is intended to encourage investors to move into other assets.
It also affects the way pension funds liabilities are calculated using a formula known as the discount rate. Lower gilt yields and long-term interest rates mean that pension funds are more expensive to fund, and so appear deeper in the red.
Those in ‘defined contribution’ or money purchase pensions have not escaped the effects of QE either. The NAPF found that falling annuity rates mean the average person with a pension pot of £26K retiring now would get 22% less income than if they had annuitised four years ago. This is a loss of £440 a year.
One of the aims of QE is to make riskier assets more attractive to investors, but an NAPF survey covering pension funds representing £108bn showed that this has not happened. Almost four in ten (38%) reported no change in their investment strategy, while one in six (16%) said they would still be pushed towards gilts. Only 14% said they would move away from gilts to riskier investments. Where funds are moving out of gilts it is generally towards corporate bonds or other inflation-linked assets.
This illustrates the conflicting pressures that pension funds are under. QE makes gilts less attractive, but pension funds are under great pressure to ‘derisk’ and make the liabilities of their pension schemes more predictable. Holding gilts is one way of doing this.
The survey asked what the authorities might do to help. Pension funds were most supportive of:
- The Bank of England and the Pensions Regulator (tPR) issuing a statement explaining the effects of QE on pension fund deficits to help offset their impact on share values.
- tPR encouraging the use of a more stable long-term discount rate for valuing liabilities. One possibility is to link this to corporate bond yields, rather than gilt yields.
- tPR extending the timeframe over which pension funds need to be able to clear their deficit. These are known as recovery periods and currently range from 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.
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 £180bn.
Notes to editors:
1. The NAPF is the leading voice of workplace pensions in the UK. We speak for 1,200 pension schemes with some 15 million members and assets of around £800 billion. NAPF members also include over 400 businesses providing essential services to the pensions sector.
2. The NAPF report into QE and its effect on pension funds ‘Exceptional times, exceptional measures?’ is available at.
Paul Platt, Head of Media and PR, NAPF, 020 7601 1717 or 07917 506 683, [email protected]
Christian Zarro, Press Officer, NAPF, 020 7601 1718 or 07825 171 446, [email protected]