Quantitative easing has had a broadly neutral impact on both defined benefit and defined contribution pension schemes, according to the Bank of England.
In The distributional effects of asset purchases, published today, the Bank said the main factor driving both widening DB deficits and the decline in annuity income than can be purchased from other pension funds was the fall in equity prices relative to gilt prices.
'This fall in the relative price of equities was not caused by QE,' it said. 'It happened in all the major economies, much of it occurred prior to the start of asset purchases, and stemmed in large part from the reluctance of investors to hold risky assets, such as equities, given the deterioration in the economic outlook, almost certainly as a result of the financial crisis.
'Indeed, by boosting the economy, monetary policy actions in the United Kingdom and overseas probably dampened this effect.'
The Bank has now spent £375bn on its asset purchasing programme, better known as QE. The programme has come under fire from pension funds and other retirement experts for its impact on both pension schemes and businesses.
However, in today's report, the Bank claimed without these measures it claimed that 'most people' in the UK would have been worse off.
'Economic growth would have been lower. Unemployment would have been higher. Many more companies would have gone out of business,' it said. 'This would have had a significant detrimental impact on savers and pensioners along with every other group in our society. All assessments of the effect of asset purchases must be seen in that light.'
It explained that while its asset purchasing of gilts had caused the price of gilts to rise and yields to fall, it had led to an increase in demand for other assets, including corporate bond and equities.
'The Bank's assessment is that asset purchases have pushed up the price of equities by at least as much as they have pushed up the price of gilts,' it said.
This had boosted the value of households' financial wealth held outside pension funds and in particular the richest top 5% of households holding 40% of those assets.
Referring specifically to DC schemes it said that, while lower gilt yields caused by QE had reduced annuity rates, the asset purchasing programme had also raised the value of pension fund assets.
'Once allowance is made for that, QE is estimated to have had a broadly neutral impact on the value of the annuity income that can be purchased from a typical personal pension pot invested in a mixture of bonds and equities,' the Bank said in a statement.
QE had also had a 'broadly neutral' impact on fully-funded DB schemes, it said. But, for a DB scheme already in substantial deficit, asset purchases are likely to have made the deficit larger.
'That is because although QE raised the value of the assets and liabilities by a similar proportion, that nonetheless implies a widening in the gap between the two,' the Bank explained. 'The burden of these deficits is likely to fall on employers and future employees, rather than those coming up for retirement now.'
Malcolm McLean, consultant at Barnett Waddingham, said it was 'disingenuous in the extreme' for the Bank to say that QE and its impact on gilt yields was not having a negative impact on annuity rates and pension funding. The bank should take a 'reality check' on the issue, he suggested.
'Although there are other factors, notably improving longevity, that have contributed to the problem, most experts would agree that QE has been bad news in that respect,' he said.
'Indeed, if the Bank were to persist with is policy and annuity rates were to fall much lower we will reach the point, which I fear we are close to now, where annuities simply repay the original capital to those who live to their normal life expectancy - and are, of course, offering substantially less value to those who might not.
'This is adding to the problem we are all struggling with at the present time of trying to persuade people that they must plan for their old age and that pensions are a cost-efficient way of doing so.'
COMMENTS
There is no obvious link between QE and Equities, unlike gilts where the impact is more direct and discernible. Equities may take off a temporary rally upon QE but this is usually not sustained over time. The problem is that Pension funds report their market value of assets (inc equities) at a defined moment in time. By the time, they report the market value of their assets (inc Equities), it is usually the case that the temporary filip on equities has been reversed, leaving deficits wider.
Ashley Moheeput, Actuary - 30/08/2012
