In the last few days the Bank of England announced plans to increase quantitative easing by a further £75bn in the hope that it will kick-start the economy. As a result of quantitative easing, we are likely to see the price of gilts increase, pushing down interest rates.
The use of quantitative easing to boost the economy has been widely hailed as a disaster for company pension schemes which are often highly reliant on gilt returns, but what exactly does the announcement mean for your pension scheme?
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.
Things may not all be doom and gloom for employers though. The National Association of Pension Funds (NAPF) is also calling on the pensions regulator to ease regulations governing final salary schemes, to help ease the pressure on employers.
Pension contributors in money purchase schemes may also lose out on returns if interest rates are pushed down, meaning that they either have to increase contributions or face a significantly smaller pension fund.
The good news is that the depression of interest rates may not last, but nonetheless the implications for pension savers and employers could very serious indeed, and many of us will be keeping a keen eye on further developments over the coming weeks and months.