4th February 2013
Altmann, who is director general of Saga, was speaking in a personal capacity at a Pension Investment Academy seminar in London last week. She said that the Bank of England’s analysis that quantitative easing has not damaged pensions is wrong and that one of the biggest mistakes has been to implement QE by the exclusive purchase of gilts.
Now this morning’s Telegraph reports that the chief executive of Prudential Tidjane Thiam has warned against further QE at a private breakfast meeting. Thiam reportedly said: “QE was a good short-term fix. In 2008, 2009 and 2010 it was the right answer. But now, it is different. We are just storing long term trouble by minimising short term pain.”
Altmann contends 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 involves 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. She says that 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.
Altmann said that for many schemes, this has led to the death of the sponsoring company and points to the increased liabilities falling on the Government 'lifeboat' for pension schemes where the company sponsor goes bust.
She adds: “As scheme deficits rise, their sponsor company is at a greater risk of failing and the scheme then being forced into the Pension Protection Fund (PPF). The PPF’s defined benefit 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.”