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ECB should not allow funds to suffer ‘collateral damage’

The European pensions industry must not become collateral damage as the European Central Bank (ECB) rolls out its quantitative easing (QE) programme and increases pension deficits, while measures are needed to counter low interest rates, PensionsEurope has urged. 

In a submission on the impact of QE, the industry association said regulators should postpone any fund valuations until the ECB had ceased its QE programme or developed a discount rate that accounts for its impact.

PensionsEurope said it accepted economic growth was crucial for Continental Europe and declined to say whether the policy of QE was good or bad. But it warned that funds should not just be seen as “collateral damage”.

It added that the impact of QE would initially be hard to determine, and that the low interest-rate environment was not solely driven by the ECB’s intervention.

“Along with this low interest-rate environment, the QE policy is likely to further decrease long-term interest rates,” the paper said.

“Indeed, although the markets had anticipated the ECB policy of QE, after the announcement, the 10-year interest rate on German Bunds further decreased by 16 basis points to 0.36%, but thereafter increasing to 0.39%.

“The 30-year swap interest rate decreased by 12 basis points to 1.24% but in the following days increased by 6 basis points again.”

PensionsEurope proposed several ways the impact of QE could be mitigated, such as suspending pension fund valuations, amending discount rates to take into account the impact of QE or allowing actuarial valuations to consider the policy’s impact.

It added: “The regulators could encourage scheme valuations to be based on an average funding figure over a defined number of last years to even out any adverse effects of QE on real bond yields.”

The idea of smoothing was considered by the UK government in 2013 in the wake of the Bank of England’s own QE programme but dismissed when consultation failed to show a strong case for the changes.

In 2012, Sweden introduced a temporary floor for the discount rate used by domestic pension providers after it fell to the then-historical low of 1.3%.

Proposals to relax the valuation cycle or loosen funding requirements have already been rejected by Ireland’s Pensions Authority, which previously said there should be “no question” of changing the funding standard in light of QE.

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