The Bank of England’s announcement that it will inject £75 billion into the economy through quantitative easing (QE) has raised concerns over pension scheme liabilities and annuity prices.
The National Association of Pension Funds (NAPF) said that the move would make it more expensive for employers to provide pensions and weaken the funding of schemes as their deficits increase. It has called an urgent meeting with The Pensions Regulator (TPR) to discuss ways to protect UK pensions from the negative effects of quantitative easing.
Danny Vassiliades, a principal at Punter Southall, said: “UK pension schemes may end up paying a QE premium as this latest round of quantitative easing may cause the double-whammy of driving-down gilt yields and driving-up inflation expectations, both of which increase the value placed on UK pension scheme liabilities.”
According to PricewaterhouseCoopers (PWC), recent equity falls are bolstering the gilts market, driving up the cost of purchasing an annuity and pushing down pension incomes.
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Peter McDonald, partner in the pension practice at PWC, said: “Compared to only three years ago, a money-purchase pension scheme is now worth perhaps 30% less than it was.
“Many people retiring now will be caught between a rock and a hard place. If they defer buying an annuity until prices improve, they are stuck with no income in the meantime, which might not be an option.
“This huge reduction is due to a double-whammy of higher annuity costs and a smaller pension pot, where investments had not switched out of equities before retirement. This could happen if someone finds themselves out of work unexpectedly, not an uncommon scenario in the current economic climate.”
