Quantitative easing has 'distorted' pension liabilities
UK - The Bank of England’s policy of quantitative easing has indirectly increased the pension scheme deficits of FTSE 100 companies, consultancy firm Deloitte has claimed, as the price of gilts have “soared to their highest level in 20 years”.
Research published by the consulting firm used analysis of asset and liability information to calculate the funding position of each FTSE 100 UK pension scheme, and revealed in the first quarter of 2009 the combined cash funding shortfall, or deficit, in these schemes rose by £50bn to £180bn (€199bn).
Although the firm admitted this increase was mainly the result of equity price declines, which fell around 10%, it argued the quantitative easing strategy - releasing more money into the economy by buying gilts - has had a “distorting influence on pension liabilities”.
This is because trustees generally value liabilities based on gilt prices, so the fact the cost of these instruments “soared to their highest level in 20 years after the quantitative easing policy was announced”, meant the value of liabilities, and therefore the deficit, has also increased.
Deloitte also warned the increased deficit in the FTSE 100 schemes could prompt trustees to ask for higher employer contributions, which some companies may not be able to afford.
David Robbins, pensions partner at Deloitte, said: “Quantitative easing was designed to put more cash into circulation. However for pension schemes this may inadvertently have had the opposite effect. Increased deficits are likely to lead to trustees demanding greater cash contributions from the businesses that support their pension funds.”
However, the firm noted because it is expected that gilt prices will fall back once the quantitative easing policy is relaxed, trustees should take this into account when asking sponsoring employers for more money.
In an update following the latest meeting of the Monetary Policy Committee (MPC) today, the Bank of England confirmed it would continue with the £75bn quantitative easing programme, and revealed while £26bn of asset purchases had already been made the process would take another two months to complete.
Robbins said: “Trustees shouldn’t bite the hand that feeds them and should only make reasonable demands on companies. Trustees should carefully consider how they apply gilt prices in calculating liabilities for cash contribution purposes, rather than blindly following past practice.”
The figures from Deloitte follows research by Aon Consulting last week on the funding levels of the UK’s largest 200 private pension schemes, which claimed the introduction of quantitative easing last month “was linked to a dramatic fall in the yield on corporate bonds, which in turn increased liabilities, and hence deficits, by an estimated £40bn”.
Sarah Abraham, consultant and actuary at Aon, added: “The impact of quantitative easing may mean excessively heavy funding requirements for employers who have funding valuations due at the end of March.”
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