QE2 Inflicts £90 Bn Blow to Pension Funds

(Reuters) - The cost to pension industry of the Bank of England's latest round of quantitative easing could total 90 billion pounds ($141 billion), diverting company cash away from investment in the economy in order to plug retirement fund deficits, the industry warned on Thursday.

Quantitative easing (QE) depresses the yield on government bonds, known as gilts, a staple investment for pensions funds, making it more expensive to pay for future liabilities, the National Association of Pension Funds (NAPF) said.

In the past six months the central bank expanded its stimulus measures by 125 billion pounds to try and kick-start economic growth, pushing yields on longer-dated debt to record lows.

This was in addition to a first round of QE launched in March 2009 of 200 billion pounds, which is estimated to have pushed gilt yields down by around 100 basis points, increasing pension fund liabilities by around 180 billion pounds, according to the NAPF.

Businesses running final salary pensions are being clouted by QE, Joanne Segars, NAPF Chief Executive, said.

Deficits that were already big now look even bigger because of its artificial distortions.

The NAPF also warns that the cost to defined contribution (DC) schemes are also rising as annuities that many retirees buy to ensure a steady income become more expensive.

The average person with a pension pot of 26,000 pounds can now expect 22 percent less income than four years ago at a loss of 440 pounds a year.

The knock-on effects from rising pension liabilities could have a series of negative consequences on the economy, the pensions body warns.

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, said Segars.

The NAPF, which represents 1,200 pension schemes in the UK, with 15 million members and assets of around 800 billion pounds, is calling on the Bank and the Pensions Regulator to address the concerns.

We need to see stronger action from the authorities on this massive issue, which will hurt pension schemes for some time yet, said Segars.

The pensions industry wants to see the authorities acknowledging that pension deficits have been distorted by stimulus measures, as well as concrete adjustments to mitigate their effects.

It suggests a more stable discount rate might be applied to assessing liabilities as well as an extension of the time frame in which firms are obliged to clear their pension deficits.

In February, Bank deputy Governor Charlie Bean downplayed the effects QE might be having on pensions. He said that pensioners should not be immune to the downturn and would have to share the burden alongside the rest of the population.

Fellow Bank policymaker David Miles has also rejected criticism that QE has been bad for those about to retire. While QE has increased the cost of annuities, this was largely offset by a rise in the value of their investment funds, he said on March 1.

The collective deficit of Britain's 6,432 final salary schemes stood at 265 billion pounds by the end of January, according to official figures compiled by the Pension Protection Fund (PPF). A year earlier, the schemes recorded a surplus of 38 billion pounds.