Quantitative easing measures introduced by the UK’s Bank of England aimed at kick-starting the local economy have had the unintended consequence of pushing up UK pension scheme liabilities.
The Bank of England last week announced its intention to pump up to £150 billion into UK capital markets, with £75 billion used initially to purchase assets (predominantly gilts). The move was intended to increase the supply of money into markets and thereby stimulate the economy.
Long-dated government and corporate bond yields fell overnight on March 5, by just under 30 basis points of 0.3 per cent per annum, which had the effect of increasing the value placed on pension liabilities.
UK consulting firm Hymans Robertson estimates that the aggregate pension deficit of the FTSE350 companies under the IAS19 accounting standard (which uses AA rated corporate bond yields as its reference point) increased overnight by £12 billion – from £41 billion to £53 billion.
“The impact of the fall in corporate bond yields on pension deficit reported under IAS19 will be significantly detrimental for companies who report their financial results at 31 March 2009,” said Clive Fortes, actuary, partner and head of corporate consulting at Hymans Robertson.
“Taking the FTSE350 companies in aggregate, pension deficits at March 31, 2009 are set to be £69 billion higher than reported at December 31, 2008.”
Fortes said companies reporting at March 31 which show significantly worse pension positions will be in part “collateral damage” of quantitative easing.
“The increase in pension deficits has been exacerbated by the 20 per cent fall in equity values since 31 December 2008, which accounts for £34 billion of the £69 billion increase in deficits since the start of the year,” he said.
Patrick Bloomfield, actuary and partner at Hymans Robertson, said pension schemes had been a casualty of the Bank of England injecting financial adrenaline into the economy.
“Long-dated gilts are the assets pension schemes would seek to buy to match their liabilities,” he said.
“The price of buying these matching assets has been pushed up by the Bank of England creating money and buying around a third of the gilts currently in issue, crowding out other investors such as pension schemes.
“The glimmer of hope for pension schemes trying to meet the bigger deficits created by quantitative easing is if the policy successfully feeds through to better corporate profitability and higher equity values. Whether this is achieved remains to be seen.”