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The Actuary The magazine of the Institute & Faculty of Actuaries

Quantitative easing poses further threat to pension scheme funding

Commenting on the minutes from the latest Monetary Policy Committee meeting, Mr Chapman said: “The vote was unchanged: Eight for no change, Adam Posen for another £50bn of asset purchases now. However, of the members voting for change, the minutes note that most ‘thought that it was increasingly probable that further asset purchases to loosen monetary conditions would become warranted at some point’.

"Unless economic numbers improve soon, the question is when not if we will get more quantitative easing (QE). The bank's shown estimates suggest that the first round of QE served to reduce bond yields by around 1%. For a typical pension scheme, that would increase the value of the liabilities by around 20%.

"Pension funds have already suffered a sharp setback in funding position over the past two months as bond yields continue to fall. However, those who are hoping for a quick recovery due to bond yields rising again may well prove to be disappointed. Trustees should ensure that their portfolio is positioned to generate meaningful returns based on their market views and inflation, while keeping downside risk within tolerable levels.

"Many pension funds continue to run unnecessarily large exposures to interest rate risks. Markets remain very volatile and, whilst it is not the time for knee jerk reaction, risks on the downside remain and taking tough decisions to address this mismatch may be necessary over the coming months. Trustees should ensure they plan ahead and are ready to respond swiftly when market conditions require."