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Experts call for other solutions to UK’s woes as QE harms pensions

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The UK economy needs other solutions to its economic troubles beside the type of increased monetary stimulus announced by the Bank of England yesterday, which is deepening defined benefit (DB) pension fund deficits, experts say. 

The UK central bank said it would halve interest rates to 0.25%, expand its quantitative easing (QE) programme by £70bn (€81.9bn) – via £10bn in corporate bonds and £60bn in Gilts – and launch a “Term Funding Scheme” to ensure banks pass the interest-rate cut onto individual and corporate borrowers.

Former pensions minister Ros Altmann said the Bank of England’s statement completely ignored the pension impact of its policies, and that the monetary easing would mean more pain for UK pensions as QE worsened deficits and increased annuity costs.

“Both defined benefit and defined contribution pensions have become more expensive as rates keep falling,” she said, adding that consultancy Hymans Robertson estimated deficits of UK final salary-type schemes post-Brexit had grown to £935bn.  

“A further fall in interest rates as a result of (yesterday’s) Bank of England announcement will see this figure increase further towards the £1trn mark,” she said.

“This damaging side-effect of monetary policy means bigger burdens on UK employers. The consequences of rising deficits are that employers struggling to support these schemes face pressure to put in more money.” 

If the Bank of England ignored the effect of monetary policy on pension schemes, the government and the Pensions Regulator need to take the issue more seriously, Altmann said.  

“So far, very little has been done to address the stress on employers,” she said.

Amlan Roy, a senior research associate at the London School of Economics (LSE) and a guest finance professor at London Business School (LBS), said there were limits to monetary policy effectiveness, and that this was just one reason why fiscal policy measures, as well as structural reforms, were necessary to tackle economic weakness.

Roy said all three “arrows” – fiscal stimulus, monetary easing and structural reforms – put in place by Japanese prime minister Shinzo Abe to revive the economy after December 2012 were needed all over the world.

“Parallels to the Great Depression gloss over market linkages, sophistication and heterogeneity,” he told IPE.

“Creating jobs and fiscal policy with structural reforms as complementary is a must, in my view.”

Altmann said trustees of DB schemes were caught between a rock and a hard place, needing to take on more risk while being expected to take less.

“Trustees of pension schemes, whose deficits keep rising, are facing almost impossible investment dilemmas,” she said.

“If the scheme deficit has risen, trustees need to consider asking the employer to put more money in to fill the shortfall, but if the employer has already put huge sums in or cannot afford to do more at the moment, then trustees ideally need to find other ways to reduce the deficit.”

Meanwhile, Nigel Green, chief executive of financial consultancy deVere, said the Bank of England’s package of measures designed to cushion the UK from recession were not the answer to the country’s economic troubles.

“Monetary policy alone is not the magic wand to reduce the ills of the economy,” he said.

Slashing the key interest rate to historic lows and extending the QE programme to £435bn in total was going to unleash more “catastrophic damage on pensions, pension funds and, potentially, the UK’s long-term sustainable economic growth,” he said.

“A different solution – a more direct way of boosting growth – rather than forcing Gilt yields lower, has to be found by the Bank of England,” he added.

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