Consequences of Quantitative Easing

1st September 2016

Bank of England rate reduction makes pensions more expensive:  The level of funds required to pay promised pensions in future decades depends on how much return one is expected to earn on the money set aside for pensions right now.  The lower the future expected returns, the more money must be put in today.  The cost of pensions, whether Defined Benefit or Defined Contributions, ultimately depends on the returns on gilts.  As gilt yields fall following QE, annuity rates fall and pensions become more expensive. -

Rises in asset prices don’t offset rise in the liabilities so pension deficits worsen:  The sensitivity analysis shows that every one percentage point fall in long gilt yields will increase the average pension fund’s liabilities by 20%, while its asset values will only increase by around 7-10%.  Therefore, as gilt yields decline, pension deficits increase and any rise in asset prices is less than the rise in the liabilities or annuity costs.

Deficits are approaching £1trillion:  Hymans Robertson estimated that deficits of UK final salary-type schemes post-Brexit had risen to £935billion.  A further fall in interest rates as a result of today’s Bank of England announcement will see this figure increase further towards the £1trillion mark.  The value of liabilities, as measured at today’s interest rates, is well over £2trillion.

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