British pensions are in a spiral of doom triggered by £375 billion of quantitative easing sanctioned by the Bank of England, claims a leading pension expert.
Although no more QE was signalled when the bank set interest rates for August, the damage is already done, says Dr Ros Altmann, director general of over 50s financial firm Saga and former government pensions adviser.
She claims printing money to buy gilts forces down long-term interest rates and puts workplace pension schemes under stress as deficits rise.
“This is turning into a death spiral. The lower gilt yields fall, the worse pension deficits become. The worse pension deficits become, the more trustees will feel they need to ‘de-risk’. This often means buying more gilts which itself means worse deficits because trustees are competing with the Bank of England which is also trying to buy gilts due to QE,” she said.
“Added to this, many employers will want to get rid of their pension risks altogether, which would mean ultimately a full buyout – but the lower gilt yields fall, the higher the costs of buyout and the more unaffordable that option becomes.
“Firms are left trying to find more money to plug pension deficits, causing funds to be diverted from creating jobs and expanding operations. Worryingly too, companies trying to borrow money to expand or to meet a pension recovery plan are finding the banks increasingly unwilling to lend because of the pension deficit. This vicious circle must not be allowed to continue. Artificially inflating pension deficits is hampering economic recovery.
“This is all madness – gilts are at unrealistic levels and this distortion is causing further distortions in other parts of the economy, which ultimately result in a downward spiral. Pension liability valuations should not be marked to current artificially engineered interest rates.”
Altmann explains QE is also damaging annuity rates, distorting the entire UK pension system, from defined benefit to defined contribution and then on into retirement.
“The Bank of England has not taken this problem seriously, yet it is having a dreadful impact on companies. By weakening the financial resources and access to credit of companies with final salary pension schemes, the economy is suffering and companies are failing. This impacts on employment and growth,” she said.