The Bank of England and Pensions Regulator must take stronger action to address the impact that quantitative easing has on pension funds, the National Association of Pensions Funds said yesterday.
Printing £125bn in new money over the past six months in the second round of QE has hit pension funds harder than expected, the association said, contributing to a £90bn increase in schemes' deficits.
This is because the Bank's buying of debt pushes up the price of government gilts, in turn reducing yields on pension funds' new investment in gilts. The move is intended to encourage investors to move into other assets.
QE also affects how pension fund liabilities are calculated using the discount rate formula, the NAPF explained, with lower gilt yields and long-term interest rates making pension funds more expensive to fund. As a result, they appear deeper in the red.
To address the situation, the NAPF called on the Pensions Regulator to change the way that pension fund liabilities are calculated, and to give pension funds more time to cover deficits.
It also said the Bank of England and the Regulator should make a joint statement explaining how the distortions caused by QE make pension deficits look artificially high.
Joanne Segars, NAPF chief executive, said: 'Pension funds want a stronger economy, so they are on board with the QE project for now. 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.
'Firms are legally obliged to fill the deficits, and that diverts money away from jobs and investment, and will lead to further closures of final salary pensions in the private sector. Retirees trying to get a good annuity are feeling the pain too - they are getting a fifth less than they would before QE started.
'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.'
Analysis published by the NAPF yesterday shows that the first round of QE, which started in March 2009 and pushed gilt yields down by around 100 basis points, would have increased pension fund liabilities by around £180bn.
Yesterday, consultants Xafinity publishedfigures showing that QE contributed to a £91bn increase in scheme deficits last month.