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Trustees demand further action from regulator to reduce QE impact

UK - Pension scheme trustees in the UK think the Pensions Regulator (TPR) has not done enough to reduce the impact of quantitative easing (QE) on funds, according to a new survey.

Four-fifths of UK pension trustees polled by fiduciary manager SEI felt the regulator should provide more flexibility in the existing rules to reduce the impact of QE on pension scheme liabilities.

In April, it outlined proposals to provide flexibility in recovery plans where sponsors were struggling to meet demands, while ruling out any more far-reaching allowances around assumptions or other rules.

Half the survey respondents who wanted more flexibility said that pension scheme liabilities should be based on an average of the last three years’ bond yields, a technique not dissimilar to the smoothing employed in the Netherlands, while 38% felt the period for meeting funding objectives should be extended. And 12% called for a reduction in the pension protection levy.

July’s decision by the Bank of England to extend QE by a further £50bn (€62bn) of bond purchases will take the overall total of QE to £375bn, with more expected later in the year. Following the latest round of QE in July, 10-year gilt yields fell to record lows of 1.4%, representing an increase of around £40bn in liabilities.

Charles Marandu, director, European institutional advice for SEI commented: “The results demonstrate that pension scheme trustees remain concerned that QE is distorting market interest rates and pushing up scheme deficits.”

“The Pension Regulator’s statement that flexibility exists within recovery plans seems to have given trustees little comfort, as there was no relief for headline scheme deficits.”

Marandu said most trustees who responded favoured smoothing the volatility in funding positions by using an average of historical interest rates to determine the funding liabilities, but as yet these measures had been resisted by the authorities.

He added: “One possible relief measure could be to allow a degree of extra flexibility in the setting of discount rates which explicitly adjusts for QE without necessarily requiring the scheme investment policy to be re-risked in order to support it.”

The precedent for smoothing the discount rate has already been set in the recent past, by several countries including the Netherlands and Denmark.

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