Further quantitative easing could damage pension prospects

The Momentum UK Team 10 February 2012

The Bank of England has announced plans to increase its Quantitative Easing (QE) programme by a further £50billion, bringing the total to £325billion- a move which is likely to cause dismay to the pension industry.

The Bank hopes that increasing the stimulus package will help encourage growth in a slowing economy and avoid inflation falling below the Government target of 2%. The Bank said in a statement:

"Some recent business surveys have painted a more positive picture and asset prices have risen. But the pace of expansion in the United Kingdom's main export markets has also slowed and concerns remain about the indebtedness and competitiveness of some euro-area countries."

Much of the additional £50million is likely to be introduced into circulation through the purchase of government bond or "gilts", which will cause yields to fall. In turn, low gilt yields could increase the deficit in many final salary pension schemes and depress annuity rates further in 2012- bad news for pension savers or those approaching retirement.

Joanne Segars, the chief executive of the National Association of Pension Funds, said while she could understand the need to boost the economy, QE was damaging the value of pensions:

"Retirees who get locked into a weak annuity will find that the Bank's money printing leaves them out of pocket for the rest of their lives.

"For the companies that run final salary pensions, QE is a headache which pushes their pension funds further into the red. This means businesses have to put more money into their pension schemes, instead of spending it on jobs and investment. Our fear is that firms struggling with a weak economy will simply choose to close their pension schemes.

"If there is a depression in interest rates, low returns on investment will increase the deficit in many final salary pension schemes. It could mean extra expense for employers forced to bridge the gap, and it might make it more expensive to provide the scheme in the first place. Increased financial pressure may be especially hard to deal with in throes of an economic crisis."

For more information on annuity rates or pension schemes, visit our annuity and pension sections.