The overall impact of quantitative easing on UK pension funds has been exaggerated and should not be used as an excuse for schemes not to de-risk, Towers Watson said yesterday.
30 OCT 2012 | THE ACTUARY NEWSDESK: NICK MANN
UK index-linked gilt (ILG) yields have declined only marginally more than comparable government bond yields in countries where there had been no QE, the consultancy explained. The price of risky assets has also risen significantly during each bout of QE, dampening the impact of the policy on pension fund balance sheets, it noted.
Pension funds have regularly criticised QE by claiming that, by pumping £375bn into the UK economy, the Bank of England has artificially increased the size of pension deficits.
However, Towers Watson said that QE was 'likely' to have averted a far bigger economic downturn, which would have led to more pension fund sponsors failing. This has in turn limited its impact on the Pension Protection Fund and given pension funds more time to execute their journey plans.
Alasdair MacDonald, head of investment strategy at Towers Watson, said: 'Many commentators are suggesting that QE by the Bank of England has led to a significant fall in ILG yields and pension funds need simply to weather the current storm of low gilt yields for a few years, before they are able to de-risk at much more attractive terms.
'We do not share this view and would urge funds not to use this as an excuse for inaction.'
According to the consultancy, low bond yields partly reflect investor concern about the eurozone and the impact that a breakup of the single currency bloc would have. De-risking now can ensure a pension fund remains solvent until the market becomes 'more rational', it said.
MacDonald said: 'Drawing on Keynes' view that markets can remain irrational for longer than an investor can remain solvent, pension funds must consider that there is a chance that yields do not recover from current levels and developed markets repeat the experience of Japan. We believe that there is a 20% chance of this occurring and a scenario that should concern many trustees.'
In August, the Bank of England said QE's impact on pension schemes had been 'broadly neutral', with the fall in equity prices relative to gilt prices the main factor behind widening pension deficits.