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Charlie Bean defends Bank of England against pensioners' QE attack
The Deputy Governor of the Bank of England has told pension funds they cannot count on a rise in gilt yields to close their ballooning deficits as he warned that more quantitative easing may be on the way.
11:30AM BST 23 May 2012
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In a speech to the National Association of Pension Funds (NAPF), Charlie Bean also defended the Bank against claims that QE is impoverishing pensioners and crippling final salary schemes by slashing investment returns.
“Not only is the adverse impact of QE on pension funds often exaggerated, but the excessive focus on QE also risks distracting attention from other factors which may present a more durable challenge,” he said.
“Confidence in the Government’s commitment to fiscal consolidation, together with heightened concerns about the fiscal positions of some euro-area sovereigns, has exerted downward pressure on gilt yields.”
Pension funds' investment returns are closely linked to government borrowing costs, which have been falling due to both QE and Britain's safe-haven status.
Mr Bean’s comments came as the minutes to this month’s Monetary Policy Committee meeting revealed that the Bank is close to launching QE for a third time. Although only one of the nine committee members voted for more QE, the decision for several others was “finely balanced”.
David Miles again wanted to increase the £325bn programme by another £25bn. The eight other members voted to hold interest rates at 0.5pc and leave QE unchanged. Economists said the MPC's position could herald another £50bn as early as June.
Speaking to the NAPF, Mr Bean confirmed that the Bank is ready to start the printing presses rolling again. “If conditions do deteriorate significantly, we may need to re-start the programme of purchases,” he said. “Indeed, as the minutes reveal, the decision not to extend the programme was quite finely balanced.”
The combination of more potential QE as well as an ongoing flight to safe haven investments will continue to push yields down in the UK, Mr Bean warned.
“It may be tempting to conclude that the current abnormally low yields are primarily a consequence of QE, and that the right approach is just to look through the associated rise in deficits. This may not, in fact, be the most prudent course to take,” he said. “Pension funds and their sponsors may, I am afraid, have to contend with low yields for some considerable time yet.”
The Bank has been under constant fire for the last few months from pensioner groups who claim that retirees buying annuities are getting less for their money due to low gilt yields. Trustees, too, have complained about the damage QE has had on deficits by lowering incomes.
Pension Corporation has estimated that QE has added as much as £74bn to pension deficits and that companies may need to inject another £100bn into schemes over the next three years. Ros Altmann, director general of Saga, has described QE as an “unmitigated disaster for anyone recently or soon-to-be retired”.
Mr Bean hit back by saying QE put “upward pressure on the prices of a whole range of assets, including corporate bonds and equities”, “boosts the value of people’s wealth”, and raises “confidence by removing some of the worst downside risks associated with a potential slide into deflation”.
He said any analysis of QE should reflect the upside as well as the downside, with clear evidence that share prices rose after QE was introduced – increasing the value of investments that are ultimately used to buy an annnuities.
He also suggested the problem for final salary schemes was partly due to the failure of companies to get their houses in order before the crisis. “QE does not inherently raise pension deficits,” he said. “It all depends on the initial position of the fund, with the movements in liabilities and assets likely to be broadly comparable when a scheme is fully funded.”
Analysis by the Bank showed that, excluding changes in longevity, the effect of QE on a pension fund that was “in balance” in 2007 – with neither a deficit nor a surplus – was “broadly neutral, with the overall movement in assets broadly matching the movement in liabilities”.
However, most schemes were not “in balance” but had a deficit in 2007. On the average scheme in 2007, the Bank’s analysis showed, QE did widen “the deficit by about 10pc of initial liabilities”. “The more a scheme is underfunded to begin with, the more it will find its deficit increased. This is entirely intuitive,” Mr Bean said.
Pension funds should not expect any relief in the short term, he added. The Bank may conduct more QE and gilt yields may stay low for some time due to investors’ flight to safe havens.
“Certainly the impact of QE on yields should ultimately reverse when the economic environment improves and we start to sell the gilts back to the market in order to withdraw the present exceptional monetary stimulus. Unfortunately, with the present heightened uncertainty associated with the problems in the euro area, the likely future date for us to commence selling gilts has receded somewhat,” Mr Bean said.
