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IPE special report May 2018

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UK pension funds call 'urgent' meeting with regulator over quantitative easing

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  • UK pension funds call 'urgent' meeting with regulator over quantitative easing

UK - UK pension funds have called for an urgent meeting with the Pensions Regulator to discuss ways of protecting schemes from the negative impact of the Bank of England's decision to inject a further £75bn (€87bn) into the economy through quantitative easing (QE).

The measure, announced by the Bank of England today, could have important consequences for pension funds, according to the National Association of Pension Funds (NAPF).

Joanne Segars, chief executive, said: "A strong and growing economy is essential for the long-term sustainability of UK pensions. Quantitative easing is a price worth paying, but only if it is successful in delivering the growth that businesses and pension funds need."

However, Segars stressed that QE could have adverse consequences for pension funds over the short term.
 
"Quantitative easing makes it more expensive for employers to provide pensions and will weaken the funding of schemes as their deficits increase," she said. "All this will put additional pressure on employers at a time when they are facing a bleak economic situation."
 
Quantitative easing makes gilts more expensive and, by depressing interest rates, reduces the return on pension scheme investments.

To secure the same investment return, employers therefore have to put more money into their defined-benefit pension schemes, making the provision of pensions more expensive.

Segars added: "Lower interest rates will increase pension deficits, making them look artificially large. This is even more worrying, as the Bank of England is intending to extend its gilt purchases into longer-term maturities, which will have a larger impact on pension fund deficits."

The NAPF is now planning to write to the Pensions Regulator to request an urgent meeting to discuss the implications of such a measure on pension funds and what can be done to protect them.

The decision taken by the Bank of England to expand its asset purchase programme to a total of £275bn is the second round of quantitative easing launched by the institution.

The Bank of England justified its decision, arguing that the pace of global expansion had slackened, especially in the UK's main export markets.

"Vulnerabilities associated with the indebtedness of some euro-area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally," it said. "These tensions in the world economy threaten the UK recovery."

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