2016

Quantitative easing is not easing pension deficits

4 August 2016

Alistair Jones

Alistair Jones

UK Strategic Solutions

Today the Bank of England’s Monetary Policy Committee has voted to reduce base interest rates by a quarter of a percent to 0.25% per annum.

This was largely expected by markets. However the amount of Quantitative Easing (QE) that has been announced has exceeded expectations. The Bank of England has committed to purchase £60bn of UK government bonds as well as £10bn of UK corporate bonds.

As at the time of writing this has caused the yields on long-dated index-linked gilts to drop by around 0.07% per annum. Consequently UK pension scheme liabilities will have increased by around 1.4% today. However it should be noted that whilst real yields have fallen they are not quite back to levels seen after the Brexit vote. Pension scheme liabilities have increased but not back to levels seen at the beginning of July.

Pension schemes that have significantly matched their liabilities with Liability Driven Investment (LDI) assets will have funding levels that are largely insulated from this movement in gilt yields. However pension schemes that are not well matched will experience funding level volatility.

The creation of more money to purchase bonds under QE has seen (at the time of writing) Sterling fall by around 1.4% versus the US Dollar. Overseas assets that are not currency hedged will have appreciated. UK equities have also been boosted by today’s news. Pension schemes that have risk management techniques in place such as diversified growth mandates and liability matching should find their funding levels reasonably protected from today’s news. However schemes that have not adopted these techniques may find that their deficits have widened. For schemes in this position Mark Carney offers the longer term solace that the economy has been supported and the Bank of England is aiming to protect the employer’s covenant.

Author

Alistair Jones

Alistair Jones

UK Strategic Solutions