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October 18, 2011updated 13 Apr 2017 8:47am

UK pension gloom

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 Englands governor Mervyn King, who warned that the current financial situation is "the most serious financial crisis at least since the 1930s, if not ever". However, while the banks action may be the correct thing to do for the economy, it has negative implications for the incomes of pension funds and pensioners

By LII editorial

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”.

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.”

The 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.

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