The baroness now warns the Bank of England’s QE strategies have pushed pension schemes “over the edge” because of declining yields.
The Bank of England essentially agrees, stating that it “fully” recognized that a long period of low interest rates put savers in a “very difficult position” which could result in bigger institutional savers moving to riskier assets.
Nonetheless, the Bank of England says it will not change anything.
Over the Edge
The UK’s former pensions minister has called for MPs to launch an inquiry into company pensions, saying they have been pushed into a funding crisis by measures taken by the Bank of England.
Baroness Altmann said the low interest rate environment and other Bank of England measures designed to stimulate the economy had already helped push up corporate pension deficits to almost £1tn.
This was because the Bank’s bond-buying programme, known as quantitative easing, was pushing down the yields on UK government bonds, which “defined benefit” pension schemes use to price their liabilities, and was thereby inflating their deficits.
Baroness Altmann warned that the Bank’s decision last week to cut interest rates to 0.25 per cent and launch a new £70bn round of asset purchases, would push more schemes “over the edge”.
“The Bank wants to stimulate the economy by bringing down interest rates, but the Bank is not acknowledging the negative impact these measures are having on pension deficits, and neither is the government.
“We need a national inquiry by MPs so they can look at the damage QE has done to pension funding and it needs to look at the ways that the damage can be mitigated.”
The Bank of England declined to comment on Baroness Altmann’s remarks. But in its inflation report published last week, it said that it “fully” recognised that a long period of low interest rates put savers in a ‘very difficult position’ which could result in bigger institutional savers moving to riskier assets.
Baroness Altmann’s call came as the total deficit of the UK’s 6,000 private sector defined benefit pension schemes climbed by £24bn last month, as gilt yields fell to record lows, according to Pension Protection Fund estimates.
“I don’t see how it is reasonable to ask companies with pension schemes to fill a £1tn hole and put money into their businesses as well. It doesn’t add up.”
Doesn’t Add Up
Indeed this doesn’t add up. Moreover, the BoE is clearly aware of the risks to savers. But damn the consequences, full speed ahead.
Mike “Mish” Shedlock