Joanne Segars, Chief Executive at the National Association of Pension Funds (NAPF), said:
“A strong and growing economy is essential for the long-term sustainability of UK pensions. Quantitative Easing is a price worth paying, but only if it is successful in delivering the growth that businesses and pension funds need.
“But this measure has adverse consequences for pension funds in the short-term. Quantitative Easing makes it more expensive for employers to provide pensions, and will weaken the funding of schemes as their deficits increase. All this will put additional pressure on employers at a time when they are facing a bleak economic situation.”
Quantitative Easing makes gilts more expensive and, by depressing interest rates, reduces the return on pension scheme investments. To secure the same investment return, employers therefore have to put more money into their defined-benefit pension schemes, making the provision of pensions more expensive.
Joanne Segars added:
“It is crucial that the Pensions Regulator takes into account the negative impact of Quantitative Easing on pension schemes. Lower interest rates will increase pension deficits, making them look artificially large. 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.
“We are writing to the Pensions Regulator to request an urgent meeting to discuss the implications of Quantitative Easing on pension funds and what can be done to protect them.”
At present, the assets and liabilities of a pension fund are valued every three years for statutory funding purposes.