The impact of quantitative easing (QE) measures on UK pension scheme funding levels has become less pronounced with each round of monetary stimulus, according to research by JP Morgan Asset Management (JPMAM).
In a report entitled ‘Not drowning but waving? – Quantitative easing and UK pension schemes’, the asset manager found the Bank of England’s (BoE) first round of QE had a “significant impact” on funding, reducing solvency by up to 16 percentage points – equivalent to an increase of around £150bn in the aggregate deficit of UK pension schemes.
However, the impact of QE2 announced in October 2011 was “more measured”, and by the end of 2012 the effect had “disappeared completely”.
JPMAM European head of strategy Paul Sweeting (pictured) said: “Quantitative easing has had a major impact on pension schemes, and it is important to keep pension schemes in mind if QE is on the agenda in future. The overall position seems to be that QE did artificially inflate liability values – and pension deficits – for the purposes of funding. This could well have accelerated the payment of deficit recovery contributions in many cases.
“However, successive rounds of QE have had less of an impact, and by the end of 2012 funding solvency for the actual and counterfactual models is broadly similar.”
The model used by JPMAM shows QE had a “clearly identifiable impact” on conventional gilt yields, depressing 10-year yields by as much as 200 basis points below their natural levels.
The impact of QE was felt more strongly along the short and medium parts of the yield curve than at the long end, it added. This is important for pension schemes, whose liabilities are generally longer dated. It also found the impact on long-dated yields was much greater following the first round of QE than after the second.
The analysis also showed that the impact of QE was generally felt only when the BoE was buying gilts – between the end of round one and the start of round two, the yields produced by JPMAM’s model 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 found there has been a similar impact on yields of index-linked gilts (real yields), which are of more concern to pension schemes because of the inflation protection built into pension benefits they need to pay out.
The research found at the 20-year term during both QE1 and QE2 real yields were depressed by 120 and 72 basis points respectively.
Comments