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--BOE Economists Finds Negative Effects Of QE On Pensions, But Appear Marginal
--Rising Gilt Yields Already Having Impact In Shrinking Pension Deficits
By David Robinson
     LONDON (MNI) - Detailed research by Bank of England economists highlighted
how quantitative easing exacerbated pension deficits by driving down gilt yields
and weighed on corporate investment in an ultra-low interest rate environment
but the overall effect was slight and is fading.
     The Bank economists told MNI that the deficits have already shrunk markedly
following the rise in Gilt yields. The study, alongside other Bank work, aids
understanding of the side effects of QE and ultra-low interest rate environments
but does not suggest that there were any large negative effects that would be
policy game changers.
     Economists Philip Bunn, Paul Mizen and Pawel Smietanka used data from The
Pensions Regulator to look at the effects of the widening of pension deficits
since the start of the global financial crisis on companies' dividends,
investment and wages. While firms with larger pension deficits paid lower
dividends they did not tend to invest less, unless ordered to tackle the deficit
recovery by the regulator, cushioning the economic effect.
     The widening of pension fund deficits is already being reversed with Bank
Rate and gilt yields on the up path and if the MPC does start QE unwind that
would further shrink the deficits.
     "To the extent that unwinding QE increases long-term interest rates that
would probably reduce pension deficits ... For example, the aggregate deficit in
the Pension Protection Fund 7800 index has diminished from stg220bn in August
2017 when 10 year Gilt rates were 1% to stg51bn in February 2018 when 10 year
Gilt rates were 1.5%," the authors stated in response to a question from MNI.
     The discount rates used to calculate pension fund liabilities are typically
linked to Gilt yields, and with the Bank purchasing stg435 billion of Gilts
through QE it hit yields hard, with one BOE estimate stating that stg200 billion
of asset purchase knocked 100 basis points off yields. 
     Around 40% of defined benefit (DB) pension schemes were already in deficit
in 2007 before the financial crisis, so QE came at a tricky time. The BOE
economists, however, found that the economic effect of the enlarged deficits was
slight, lowering the level of GDP since 2007 by some 0.1%.
     If the BOE does re-launch QE the impact on deficits is likely to be
relatively less of an issue in the pensions field, as DB pensions are declining
and defined contribution (DC) pensions, which avoid the problem of
pre-determined pay-outs, are fast becoming the norm.
     Office for National Statistics data published this week revealed that
employee workplace pension scheme membership rose to 73% in 2017, from 67% in
2016. While DB schemes still accounted for 39% of all such schemes this
proportion has been declining since 2012 when they accounted for 60%.
     One possible scenario, that people of retirement age have ended up working
longer because of lower pension pay-outs and boosting labour supply, is not
supported by the Bank economists work which was centred on DB schemes.
     "One cannot infer from our analysis that retirement pay-outs were lower
than they would otherwise have been as a result of QE. Retirement pay-outs from
the defined benefits pension schemes are, in general, unaffected by changes in
interest rates," the authors said.
     Nor is it clear that QE damages the finances of retirement age people, even
though it hits annuity rates which are based on gilt yields.
     Another Bank study published this week found that those around retirement
age had experienced the biggest upward effects on wealth from QE - as they were
more likely to hold assets, such as houses and equities, which were boosted by
     The primary and side effects of QE and ultra-low rate setting are proving a
fertile ground for Bank research - but so far there is no clear evidence of the
kind of hefty negative effects that would make the Bank doubt using it in
--MNI London Bureau; tel: +44 203-586-2225; email:
--MNI London Bureau; tel: +44 203-586-2223; email:
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