The Bank of Englands quantitative easing programme is creating a death spiral for UK pension funds as lower gilt yields increase their deficits, according to Saga.
While the bank's latest monthly monetary policy committee announcement earlier today did not include another further QE, Saga said the asset purchase programme had already done 'irreparable damage' to UK pension schemes. A fresh bout of QE announced last month means the bank has now pumped £375bn into the economy in a bid to encourage growth.
By printing so much new money to buy gilts, and forcing down long-term interest rates, the Bank has caused huge problems for many UK firms, Saga said, with pension deficits for FTSE 100 firms more than doubling in the past year.
Dr Ros Altmann, director general of Saga, said: 'This is turning into a "death spiral". The lower gilt yields fall, the worse pension deficits become. The worse pension deficits become, the more trustees will feel they need to de-risk. This often means buying more gilts which itself means worse deficits because trustees are competing with the Bank of England which is also trying to buy gilts due to QE.
'Added to this, many employers will want to get rid of their pension risks altogether, which would mean ultimately a full buyout - but the lower gilt yields fall, the higher the costs of buyout and the more unaffordable that option becomes.'
Companies also have to find more money to close pension deficits, which diverts funds from job creation and expansion, Dr Altmann said, while they also find it harder to borrow money from banks because of their deficits.
'This is all madness - gilts are at unrealistic levels and this distortion is causing further distortions in other parts of the economy, which ultimately result in a downward spiral. Pension liability valuations should not be marked to current artificially engineered interest rates,' she added
'The last thing our economy needs is more gilt-buying. QE is also damaging annuity rates, so the distortions are occurring right across the UK pension system, from defined benefit to defined contribution and then on into retirement.'
