UK - The Bank of England has gone on the defensive over criticism that its policy of quantitative easing (QE) has had an adverse effect on UK pension funds and their members.
The monetary easing policy has repeatedly been singled out for criticism by the pension industry over the past few years, as it has led to a reduction in bond yields and therefore an increase in pension fund liabilities. The lower bond yields have also meant lower annuity rates, reducing the income of those people now retiring with a defined contribution (DC) pension pot.
In a report published yesterday, the Bank of England argued that pension schemes were no worse off than before, while pensioners themselves were actually better off as QE had boosted wealth by pushing up asset prices - claims that were questioned by consultancy Hymans Robertson.
The report said that incomes of pensioners who were already drawing a pension prior to the launch of QE in 2009 had been unaffected by the policy.
It acknowledged that annuity rates have been reduced for those in DC schemes approaching retirement, but said QE had raised the value of pension fund assets too.
The report said: “Once allowance is made for that, QE is estimated to have had a broadly neutral impact on the value of the annuity income that can be purchased from a typical personal pension pot invested in a mixture of bonds and equities.”
The paper also said that QE’s impact had been “broadly neutral” on fully-funded DB schemes, and on the incomes of members of these schemes coming up to retirement.
“But schemes that were already in substantial deficit before the financial crisis are likely to have seen those deficits increased,” it added.
Even so, the report said the main factor behind increased pension deficits and fall in annuity incomes had not been QE, but the fall in equity prices relative to government bond prices.
“It happened in all the major economies […] and stemmed in large part from the reluctance of investors to hold risky assets, such as equities, given the deterioration in the economic outlook as a result of the financial crisis,” the report said.
“Indeed, by boosting the economy, monetary policy actions in the UK and overseas probably dampened this effect,” it argued.
But the report has been received with some scepticism by the industry.
Russell Chapman, partner in the investment practice of Hymans Robertson, told IPE that it was of course true that DB pensions had not been affected, due to the nature of the benefit guarantee.
“And overall, the Bank of England’s case stacks up on the basis of their assumptions,” he continued, “But we would question some of those assumptions.”
In particular, according to Chapman, the Bank of England’s “typical pension fund” was not reflective of where the majority of schemes were, he said.
“For instance, the Bank’s analysis focuses on a scheme that was fully funded in 2007,” he said. “But most schemes were only 70 or 80% funded then, and some schemes were even worse off.”
Chapman continued: “Even though they say that only one-third of the increase in pension scheme deficits has been caused by QE, their own figures show that since March 2009, when QE started, it has caused 80% of the total increase in deficits.”
He also said the analysis assumed that UK pension funds employed a liability matching approach, echoing statements by governor Mervyn King to the Treasury select committee earlier this year that schemes would not have been impacted had they invested in matching assets.
“That may be so in broad-brush terms,” Chapman said, “But it ignores the fact that most pension funds are holding gilts with an average term of 15 years, when they have liabilities with average maturities that are more like 25 years. That exacerbates the negative effect of QE.”
Chapman also questioned the conclusion that QE has attenuated the falls in equity prices relative to gilts.
“In 2009, when QE started, equities and bonds both rose by 20%,” he said.
“In contrast, over the past year since the second round of QE, gilts have gone up 20% but equities are down by around 5% on average. So it is difficult to attribute what happens in the markets to QE.”