Speaking at a Pension Investment Academy (PIA) seminar Dr Ros Altmann spoke of the “death spiral of falling gilt yields, leading to pensions de-risking, which leads to further falls in gilt yields. These trends have been enveloping schemes across the UK pensions industry”.
Dr Altmann argued that this continuing pattern has been caused by the effects of the Government’s decision to implement Quantitative Easing (QE) exclusively by purchasing government bonds and firmly disagrees with the Bank of England’s analysis which concluded that QE has not damaged pensions. Speaking in her personal capacity as an independent pensions expert to the audience representing fund assets in excess of £150bn, Altmann commented that:
“QE‘s lowering of gilt yields has increased pension scheme deficits, as funding levels are determined by long-term interest rates. As pension liabilities increase, trustees feel forced to look more actively at de-risking strategies, which their advisers usually consider most appropriately conducted through gilt purchases or swaps.
However, as the Bank of England’s policy of QE has involved buying more than a third of the gilt stock, normal market rates have been distorted. As pension funds try to buy more gilts, while the Bank of England also extends its asset purchases, gilt yields are pushed down further. This then forces schemes to consider further de-risking and the spiral continues. Even those schemes who wish to de-risk by annuity buy-ins or buy-outs have found that QE has driven up the cost of such strategies to quite prohibitive levels. For many schemes, the cost has actually led to the failure of the sponsor. That is why Altmann calls this a 'death spiral'.”
Dr. Altmann continued: “QE has hastened the demise of the UK pensions system. As scheme deficits rise, their sponsor company is at a greater risk of failing and the scheme then being forced into the PPF. The PPF’s DB deficit figures highlight this impact and also the volatility that schemes have to cope with on both deficits and asset values. For example – July 2011’s PPF deficit figure of £8bn was replaced by £117bn in August 2011, ballooning to £300bn a year later. For members of schemes whose employers have been unable to afford the rising costs of their scheme deficits in this interest rate environment, the end result of this is that their pensions will be significantly reduced in the PPF.
“A watershed moment has been reached and the Bank of England’s insistence that the effects of QE have been ‘broadly neutral’ is clearly contradicted by the evidence. Its analysis has focussed almost exclusively on the beneficiaries of the policy without careful enough consideration of those losing out. As their economic models are based on assumptions of a ‘normal economy’, they clearly do not represent a suitable policy for handling pensions in the current environment – with an impaired banking system, overextended consumers and an aging population whose pensions are underpinned by gilt yields. QE is effectively a tax increase on pensioners and the sooner it is ended the better.”
Trevor Cook, an Executive Director at the PIA commented: “With such difficult economic conditions still having a great effect, Government policy becomes more important than ever and its impact more heavily felt. Understanding these policies and how to react appropriately as a sponsor or scheme has therefore become increasingly crucial. We are grateful that Dr Altmann was able to provide an opportunity to present explanations to our members who, as was reflected by the concern in the questions that followed, will be greatly impacted by the results of QE.”
