The first round of the UK’s quantitative easing, or QE, may have reduced pension fund solvency by up to 16 percentage points - equivalent to an increase of about £150 billion (€178 billion) in the aggregate pension deficit, research shows.
Meanwhile, the impact of QE2 was less pronounced. In fact, by the end of last year the effect had disappeared completely, say the researchers at JP Morgan Asset Management.
Central banks across the Eurozone and various other nations, including Japan and the US, have used QE to stimulate economies.
The research team, led by Paul Sweeting, European head of strategy, found a “clearly identifiable impact on conventional gilt yields, depressing 10-year yields by as much as 200 basis points below their ‘natural’ levels”.
UK pension funds are large holders of gilts.
QE had a stronger impact on yields along the short and medium parts of the yield curve than at the long end, the researchers say in their report Not drowning but waving? – Quantitative easing and UK pension schemes.
The impact of QE was generally felt only during phases of QE when the Bank of England was buying gilts. In between QE1 and QE2, the yields were close to actual yields.
However, although the Bank of England’s actions under QE have focused almost exclusively on the purchase of conventional gilts, the research shows there has been a similar impact on yields of index-linked gilts.
Overall, the team concludes, QE did artificially inflate liability values – and pension deficits – for the purposes of funding.
Yet the researchers note that QE may also have had a positive impact on asset values, offsetting the impact on liabilities.
Shane Shepherd, senior vice president and head of fixed income research at Research Affiliates, warns that QE programmes across the world are growing larger.
QE is part of a package of measures that create an environment where interest rates are expected to be low and this, says Shepherd, puts pressure on the shorter end of sovereign bond yield curves.
“If we all believe that the overnight rate will remain at zero for the next three years, then the three-year rate should also provide a yield very close to zero,” Shepherd says.
He warns also that in this era of “financial repression”, central bank policies are more tolerant of inflation. Inflation is another important factor for pension schemes, as fighting inflation is key to their strategy.
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