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UK pension funds £90bn poorer thanks to QE2, says NAPF

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  • UK pension funds £90bn poorer thanks to QE2, says NAPF

UK - The Bank of England's second round of quantitative easing (QE) has erased £90bn (€108bn) of pension fund wealth - on top of the £180bn hit already taken, according to the industry.

Falling gilt yields as a result of the central bank's credit crunch fix have pushed final salary pension funds £90bn deeper into the red, the National Association of Pension Funds (NAPF) said.

NAPF chief executive Joanne Segars said: "Businesses running final salary pensions are being clouted by QE. Deficits that were already big now look even bigger because of its artificial distortions.

"We need to see stronger action from the authorities on this massive issue, which will hurt pension schemes for some time yet. And there is always the possibility of QE3."

Through its second round of QE, or QE2, the Bank of England has pumped £125bn of new money into the banking system in the last six months by buying bonds.

This affects final salary, or defined benefit, schemes because it pushes up the price of government bonds or gilts, creating lower yields.

Because pension funds liabilities are calculated using a discount rate, lower gilt yields and long-term interest rates mean pension funds are more expensive to fund, the NAPF said.

The first round of QE - which started in March 2009 and depressed gilt yields by around 100 basis points - would have increased pension fund liabilities by around £180bn, the association calculated.

The NAPF called on the Pensions Regulator to change the way pension fund liabilities were calculated and to give pension funds more time to cover deficits.

On top of this, the Bank of England and the regulator should make a joint statement explaining how the distortions caused by QE made pension deficits look artificially high, it said. 

"Pension funds want a stronger economy, so they are on board with the QE project for now," Segars said.

"But the latest bout of £125bn of money printing has blown a £90bn hole in their side. We need help in managing that. Pension funds cannot be left holding the baby."

The problem was diverting money away from jobs and investment as firms were forced to fill pensions deficits, she said.

People retiring were also affected, getting a fifth less in annuity income than before QE started, Segars said.

Members of money purchase, or defined contribution, schemes were also hit, according to the NAPF.

Falling annuity rates meat someone with a pension pot of £26,000 retiring now would get 22% less in income than if they had annuitised four years ago.

Although one of the aims of QE is to make riskier assets more attractive to investors, the NAPF said a survey it conducted showed this had not happened for pension funds.

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