Pension funds seek relief from quantitative easing

Bank of England The Bank's policy of QE has distorted pension fund finances, critics claim

Pension funds are calling for rule changes so they can offset the effects of the Bank of England's policy of quantitative easing (QE).

QE has reduced the returns on pension investments, helping to plunge final-salary schemes into large deficits.

The National Association of Pension Funds (NAPF) wants the regulator to let its members assume slightly higher investment returns in the future.

The Pensions Regulator said schemes already had plenty of flexibility.

"No valuation measure is an entirely accurate guide to the future, but our view is that adjusting discount rates in isolation risks simply picking the answer you want, and ignoring the reality of the situation," said a spokesman for the regulator.

"Our recent analysis and engagement with industry specialists has confirmed that there's no need for schemes to make significant adjustments to assumptions to achieve a sustainable recovery plan."

The NAPF said that nearly half of the £229bn deficit currently being carried by 6,432 final-salary schemes had been due to QE.

Under this policy, the Bank of England has so far pumped £375bn into the economy by buying government bonds currently in issue.

This has driven up their price and reduced their return, or yield.

By making the yield on government bonds less attractive, the hope is that investors who would normally hold them will instead put their money into more productive investments, and thus help stimulate the economy.

However, the reduction in bond yields has inflated the estimates that pension schemes must make of the assets they need to hold, in order to pay all their future pension payments in the future.

'Huge difference'

Earlier this year, the Pensions Regulator rejected calls for schemes to be given the leeway to ignore this effect on their finances.

Start Quote

Letting pension funds raise the discount rate ceiling could make a huge difference - wiping over £20bn off their deficits”

End Quote Mark Hyde Harrison NAPF chairman

It argued that that there was no way of telling if the reduced returns on government bonds in the past three years, caused by QE, would ever return to normal.

However, earlier this month the Pensions Regulator said it would happily let employers agree to longer deficit reduction plans with their pension schemes' trustees, to ensure that deficits were paid off without putting unnecessary strain on company finances.

The NAPF's chairman, Mark Hyde Harrison, said that UK should now also copy the example of some other countries which have already relaxed their pension scheme rules.

And he argued that it would be a straightforward step, with no need for a change to the law.

"Discount rates [the long term return on investments] are being calculated on artificially depressed gilt yields, and those false foundations are putting a lot of stress on businesses trying to keep a final salary pension going," he said.

"The authorities need to say to those running pension schemes that it's OK for a higher rate to be used, at least until things return to some normality.

"Letting pension funds raise the discount rate ceiling could make a huge difference - wiping over £20bn off their deficits," he added.

The NAPF argued that the artificial inflation of pension costs was not only exaggerating their deficits.

It said it had also caused firms to divert scarce cash to filling those deficits, undermining their own financial position, and leading them to close even more pension schemes to current members, let alone new ones.

For its part, the Bank of England has defended its QE policy on several occasions.

It has argued that without QE, savers, including pension funds, would now be worse off because their other assets such as shares would probably be much lower in value than is the case.

The Bank has also argued that QE has been the main factor staving off a much deeper recession than the one the UK has experienced since 2009.

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