UK – The governor of the Bank of England has spoken out against claims that its £325bn (€388bn) quantitative easing (QE) programme has damaged the long-term viability of the UK’s pension schemes.
Speaking at the economic affairs committee in parliament yesterday, Sir Mervyn King said the “very unfortunate” demise of defined benefit schemes predated the launch of quantitative easing.
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“I am concerned about what has happened to the pensions industry and defined benefit pensions in particular, but they reflect a much wider set of issues, and the decline of them can’t really be laid at the door of our asset purchase programme,” he said.
Challenged by the committee chair that two further instalments of quantitative easing had “quite an effect” in the past year, King argued that the impact might not have been as significant as argued by some.
“It is true that pension funds that start with a deficit, then it may appear that our operation increased the deficit,” he said.
“That is not to say that the whole operation of the pension fund is made more difficult – it is simply that if you start with a deficit and any long-term interest rate goes down, then the deficit will appear to be bigger.
“Those pension funds that were balanced had assets that matched their liabilities – which is a sensible way to run a pension fund – won’t have been effected.”
The Bank of England’s £2.5bn pension fund was almost exclusively invested in liability-matching assets at the beginning of last year, with a £2bn holding in index-linked gilts, a further £115m in regular UK sovereign debt and nearly £300m in index-linked corporate debt.
A second question addressed to King asserted that the increased deficit damaged a sponsor’s ability to invest in its own business, as it “sucks the resources away”.
“To the extent that you had gilts in the fund to begin with that were adequate to meet the future liabilities, then the lower yield would simply be the arithmetic offset of the higher price of those gilts and the income that you would get from those gilts would be unaffected,” he said.
Since March last year, the Bank of England has spent £175bn on gilt buy-backs in an attempt to stimulate the market, with experts now estimating the central bank owns around a third of all UK sovereign debt.
The National Association of Pension Funds has been highly critical of the process, arguing it had added tens of billions to pension deficits.
It has called on the Pensions Regulator to take the circumstances into account when examining scheme valuations.
Meanwhile, LCP has launched a buy-in service aimed at attracting smaller deals that it believes would previously have not been priced competitively.
With the backing of Aviva, Legal & General, MetLife and Pension Insurance Corporation, the consultancy said it would be able to offer access to deals without the need for “lengthy” negotiations.
LCP partner Clive Wellsteed argued the new system would allow the consultancy to stack the odds in favour of smaller transactions.
“Too often, smaller transactions miss out on the most competitive insurer pricing and must accept relatively ‘boilerplate’ commercial terms,” he said.
“Importantly for trustees and sponsors, there is also some welcome certainty on professional fees.”
Author: Jonathan Williams