Pension funds are calling for rule changes so they can offset the effects of the Bank of England’s policy of quantitative easing (QE), which they say has reduced the returns on pension investments, helping to plunge final-salary schemes into large deficits. The National Association of Pension Funds (NAPF) wants the regulator to let its members assume slightly higher investment returns in the future.
However, the Pensions Regulator said schemes already had plenty of flexibility. A spokesman said: “No valuation measure is an entirely accurate guide to the future, but our view is that adjusting discount rates in isolation risks simply picking the answer you want and ignoring the reality of the situation.
“Our recent analysis — along with consulting industry specialists — has confirmed that there is no need for schemes to make significant adjustments to assumptions to achieve a sustainable recovery plan.”
In contrast, NAPF said that nearly half of the £229 billion deficit currently being carried by 6,432 final-salary schemes was due to QE. Under this policy, the Bank of England has so far injected £375 billion into the economy by buying Government bonds. This has driven up their price and reduced their return, or yield. By making the yield on government bonds less attractive, the hope is that investors who would normally hold them will instead put their money into more-productive investments and thus help to stimulate the economy. However, the reduction in bond yields has inflated the estimates that pension schemes must make of the assets they need to hold in order to make all their future pension payments.
Earlier this year, the Pensions Regulator rejected calls for schemes to be given the leeway to ignore this effect on their finances, arguing that there was no way of telling if the reduced returns on Government bonds in the past three years, caused by QE, would ever return to normal. However, the Pensions Regulator has said it would happily let employers agree to longer deficit reduction plans with their pension schemes’ trustees, to ensure that deficits were paid off without putting unnecessary strain on company finances. NAPF chairman Mark Hyde Harrison said the UK should copy the example of countries that have already relaxed their pension scheme rules, arguing that this would be a straightforward step, with no need for a change to the law.
The Bank of England defends its QE policy and says that without it, savers — including pension funds — would now be worse off, because their other assets (such as shares) would probably be much lower in value than is the case. The Bank has also argued that QE has been the main factor in staving off a much deeper recession than the one the UK has experienced since 2009.
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