Pension schemes benefit from hints QE will end

US federal reserveMany investors lost out when the US Federal Reserve hinted at a winding down of quantitative easing, but not pension schemes, according to new figures.

Falling bond prices - caused by the sell-off that followed Fed chairman Ben Bernanke’s now-famous press conference in June when he suggested a “tapering” of the Fed’s bond-buying programme – served to cut pension scheme liabilities, meaning funding positions improved even as the value of pension scheme assets fell.

According to investment consultancy Mercer, defined benefit schemes of FTSE350 companies benefited from a two-point rise in the average funding ratio to 87% in June – equivalent to a £16 billion (€19 billion) decline in the aggregate deficit of these schemes.

The improvement came despite a fall in asset values of £15 billion at the schemes. Both equity and bonds were sold off after Bernanke’s speech.

“It will come as a welcome and perhaps a surprising relief to many that despite the largest monthly fall in asset values since January 2009, pension scheme deficits also experienced their largest monthly fall over the last ten months as a result of a reduction in liability values,” says Ali Tayyebi, Mercer’s head of UK defined benefit risk.

Funding levels at defined benefit pension schemes have been held down by quantitative easing, which has kept interest rates at abnormally low levels. Schemes' liabilities go up when interest rates go down.

Mercer's calculations are based on the IAS19 accounting rule.

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