QE Turning Into A ‘Death Spiral’ For Pension Schemes

by Dr. Ros Altmann

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While today’s MPC meeting brings no fresh news of the further rounds of QE, the committee needs to consider more carefully the irreparable damage that Quantative Easing is doing to UK pension schemes.

By printing so much new money to buy gilts, and forcing down long-term interest rates, the Bank has caused huge problems for many UK firms. UK pension deficits for FTSE 100 firms have more than doubled in the last year alone, despite companies pumping millions into their schemes to repair their pension shortfalls.

Dr Ros Altmann, Director-General of Saga comments:

“This is turning into a ‘death spiral’. The lower gilt yields fall, the worse pension deficits become. The worse pension deficits become, the more trustees will feel they need to ‘de-risk’. This often means buying more gilts which itself means worse deficits because trustees are competing with the Bank of England which is also trying to buy gilts due to QE. Added to this, many employers will want to get rid of their pension risks altogether, which would mean ultimately a full buyout – but the lower gilt yields fall, the higher the costs of buyout and the more unaffordable that option becomes.

“Firms are left trying to find more money to plug pension deficits, causing funds to be diverted from creating jobs and expanding operations. Worryingly too, companies trying to borrow money to expand (or to meet a pension recovery plan) are finding the banks increasingly unwilling to lend because of the pension deficit. This vicious circle must not be allowed to continue. Artificially inflating pension deficits is hampering economic recovery.

“This is all madness – gilts are at unrealistic levels and this distortion is causing further distortions in other parts of the economy, which ultimately result in a downward spiral. Pension liability valuations should not be marked to current artificially engineered interest rates.

“The last thing our economy needs is more gilt-buying. QE is also damaging annuity rates, so the distortions are occurring right across the UK pension system, from defined benefit to defined contribution and then on into retirement.

“The Bank of England has not taken this problem seriously, yet it is having a dreadful impact on companies. By weakening the financial resources and access to credit of companies with final salary pension schemes, the economy is suffering and companies are failing. This impacts on employment and growth.”