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The Actuary The magazine of the Institute & Faculty of Actuaries

BoE downplays QE impact on pension funds

The Bank of England’s deputy governor for monetary policy, Charlie Bean, has downplayed the impact that quantitative easing has had on pension scheme deficits and raised the potential for a fresh bout of gilt purchasing.


Speaking on Wednesday, Mr Bean said it would be an ‘error’ to solely attribute increases in pension deficits since the start of the economic crisis to the two rounds of QE undertaken by the Bank of England, which have together amounted to the purchase of £325bn of gilts. He also said it was wrong to say that QE ‘inherently’ raises pension deficits.

Analysis of how a pension fund in balance at the beginning of 2007 would have seen its deficit evolve during the course of the financial crisis and subsequent recession, including any effects from QE, showed the change in deficit with and without QE would have been broadly similar.

‘While the change in the deficit is certainly not trivial for a substantially underfunded scheme, the impact of QE is nevertheless small compared to the movement in the deficit associated with other factors, such as the collapse in equity prices as a result of the financial crisis and the recession,’ he said.

‘In particular, it would be an error to attribute the deterioration in pension deficits since the start of the crisis solely to the impact of QE.’

Mr Bean said the Bank’s analysis had also shown how schemes’ current deficit was also closely linked to their initial funding positions. Many funds were already in deficit at the beginning of 2007, he noted.

‘The second observation is that QE does not inherently raise pension deficits. It all depends on the initial position of the fund, with the movements in liabilities and assets likely to be broadly comparable when a scheme is fully funded,’ he said.

‘But the more a scheme is underfunded (or overfunded) to begin with, the more it will find its deficit (or surplus) increased. This is entirely intuitive. By reducing yields, QE increases the cost of purchasing a given future stream of income. So if a fund starts off relatively “asset poor”, the sponsors will now find it more costly to acquire the assets necessary to match its future obligations.’

Mr Bean warned schemes against rushing to close deficits if there were the potential for them to reduce as gilt yields improved, but also noted that problems in the eurozone meant the impact of QE on yields was unlikely to be cancelled out any time soon.

‘The impact of QE on yields should ultimately reverse when the economic environment improves and we start to sell the gilts back to the market in order to withdraw the present exceptional monetary stimulus.

‘Unfortunately, with the present heightened uncertainty associated with the problems in the euro area, the likely future date for us to commence selling gilts has receded somewhat.’

Raising the potential for a fresh bout of QE, he added: ’If conditions do deteriorate significantly, we may need to re-start the programme of purchases.’

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