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A downside to Quantitative Easing?

Pension funds are being hit, and hit hard, by quantitative easing (QE), according to the National Association of Pension Funds (NAPF). The process of QE instituted by the Bank of England in 2009, involves creating money to buy up government bonds. The purpose of this was to put more liquidity into the banks to improve their balance sheets and to give them the opportunity to increase their lending to UK industry.

Has QE had a negative side effect on pensions?

But the actual process of buying up government bonds means that demand for the bonds increases, pushing up the price of the bonds, and thus reducing the yield or income which the bonds produce. Because pension funds cannot gamble with the money invested in them, they look for safe havens which will give reasonable rates of return, and therefore put a large amount of their portfolios into UK government bonds.

QE has cost them dearly over the past three years. In February the Bank of England announced that it was further extending its programme of QE by another £50bn, to reach a total of £325bn. However, the NAPF estimate that the first round of QE pushed gilt yields down by around 100 basis points at a cost of around £180bn to pension funds. Also, the second round of QE over the last six months has added a further £90bn to that cost.

“Businesses running final salary schemes are being clouted by QE” according to Joanne Segars, NAPF Chief Executive. She went on to say that: “Firms are legally obliged to fill the deficits, and that diverts money away from jobs and investment, and will lead to further closures of final salary pensions in the private sector.”

But, David Miles, a member of the Monetary Policy Committee, defended quantitative easing on March 1st. He said: “It is implausible to see the increase in equity and corporate bond prices in the UK over the past few months as unrelated to the policy actions of the Bank of England and other central banks. And those increases in asset values will have boosted the assets of pension funds, and other savers.”

In other words, although earnings on bonds have fallen, QE has raised the face value of the bonds and has helped boost the stock market which might otherwise have gone into a slump. This should have kept up the value of overall investments.

In February, an unsympathetic Charles Bean, Deputy Governor of the Bank of England, said that pensioners should not be immune from the downturn. Basically, saying that pensioners, savers, those in work and those out of work have all had to share the burden of the steps needed to put the economy back on a surer footing.

So, basically, QE has had an overall positive effect on the economy, but we need to be aware that there are some negative side effects as well.

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Posted in Bank of England, Quantitative Easing

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