In a bid to prevent the UK
from plunging into recession, the Bank of England has embarked on a
new round of quantitative easing that will see it inject £75bn
($120bn) into the economy.
There is no other choice,
said the Bank of England’s governor Mervyn King, who warned that
the current financial situation is “the most serious financial
crisis at least since the 1930s, if not ever”.
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However, while the bank’s
action may be the correct thing to do for the economy, it has
negative implications for the incomes of pension funds and
pensioners. This is because injecting additional liquidity into the
economy will be through the banks’ purchase of government bonds, a
move likely to see their yields fall from already low
levels.
The banks’ action has sparked
a call from the National Association of Pension Funds (NAPF) for
the Pensions Regulator to consider ways of protecting pension
schemes from negative effects of quantitative easing.
“It is crucial that the
Pensions Regulator takes into account the negative impact of
quantitative easing on pension schemes. Lower interest rates will
increase [defined benefit] pension deficits, making them look
artificially large,” stressed NAPF CEO Joanne Segars.
“This is even more worrying
as the Bank of England is intending to extend its gilt purchases
into longer-term maturities, which will have a larger impact on
pension fund deficits.”
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By GlobalDataThe negative news comes at a
time when a survey conducted by the NAPF reveals that public
confidence in pension schemes is at a low ebb.
The survey showed that while
42% of working adults said they are confident in pension schemes
compared to other ways of saving, 48% said they are not. This,
noted the NAPF, resulted in a Pensions Confidence Index reading of
-6%, the first negative reading in the index’s four-year history.
In 2010 the index was at +5%, and in 2009 it was +11%.
Quantifying the plight of workers nearing retirement,
professional services firm PricewaterhouseCoopers (PwC) estimated
that pension savings of £300,000 would in early-October have
produced an annual pension income of £18,500. Three months earlier
the same lump sum would have provided an annual income of £19,500,
and three years ago nearly £22,500.
