No wonder the National Association of Pension Funds has been wailing about the Bank of England’s plan for another round of QE.
September’s update from the UK’s Pension Protection Fund makes for grim reading.
To put the above in a little bit of context, it’s the second highest deficit since data began (in 2003), exceeded only by March 2009.
Here are the culprits.
Falling equity markets = low asset values.
Lower gilt yields = higher liabilities (as they are calculated with reference to a cough, cough, risk free rate).
Now, Citigroup economist Michael Saunders says there’s a very high correlation (over 90 per cent) between the month-on-month change in forward gilt yields and the month-on-month percentage change in pension fund liabilities. Hence, the squeals of anguish from the NAPF.
The recent gilt rally lifted aggregate pension liabilities by 6.3% MoM in September, the sixth biggest MoM rise in recent years. This is an unfortunate side-effect of the runup to the QE programme.
Unfortunate indeed. Although in theory equities should benefit as investors are forced out of gilts into risky assets.
And what of UK PLC. How will they react to rising pension fund deficits?
Back to Saunders.
If sustained, rising corporate pension deficits will put pressure on companies to lift pension contributions. Effects on investment and jobs are not definite, but probably adverse.
Marvellous.
BoE research from 2005 found little link between pension contributions and investment in individual firms during 83-02. But that study largely predates the much tougher pension regulations of recent years. The CBI and British Chambers of Commerce have regularly stressed in recent years that pressure to cut pension deficits hampers investment and jobs. For example, when pension deficits soared in 2009, the CBI warned that “businesses facing yawning gaps in their own pension scheme funding risk being asked to divert much-needed cash from their business to the PPF”.
Any such adverse effects may be particularly painful at present, given the economic slowdown plus cashflow weakness of many firms (evident in the BCC survey) – and especially since the MPC are using QE to push down gilt yields to try and boost the economy.
The law of unintended consequences strikes again.
Related link:
Pension schemes reserve judgment on QE – FT