BofE's pension highlights problems of QE, says Altmann
Source - SMW
The Bank of England's own pension scheme has highlighted the problems of quantitative easing, former pensions minister Ros Altmann says.
She says while the Bank is relatively insulated by taxpayers from pension impacts of its own policies, its latest pensions report acknowledges it was damaged by falls in long-term interest rates. And Altmann says clearly the latest round of QE will cause further problems.
She says: "The Bank's scheme is relatively insulated from some of the negative impacts which the Bank of England's policies have inflicted on private sector schemes.
"This is because taxpayers fund the enormous employer contributions which have been required to overcome the deficit, while Bank of England employees do not contribute at all.
"This may help explain why the Bank of England seems so complacent about the pension problems created by its policies. However, the problems are real for most employers and may undermine the effectiveness of QE itself. These side-effects need to be taken more seriously.
"The Bank of England's pension scheme is invested entirely in bonds and has a deficit. In the year to February 2016, its pension scheme assets increased by 4.5% but its liabilities rose by 5.14%, meaning that, even with its asset allocation entirely in the safest bonds, which are supposed to match the liabilities, the assets did not actually keep up with liabilities.
"The Bank's pension fund Report acknowledges that QE imposes 'yield risk' which worsens its pension deficit, even though the scheme is only invested in bonds. It states 'the liabilities would be expected to grow by more (than the assets) in monetary terms, increasing the deficit'. The conventional wisdom that bonds will match pension liabilities is not reliable and either extra returns are required, or employers must pay significantly more to support their schemes."