The Bank of England's decision to introduce up to £150bn of quantitative easing into UK capital markets has been detrimental to pension funds, says Hymans Robertson.

The firm has pointed out that the UK central bank's purchase of around a third of all gilts currently in issue, in an effort to increase the supply of money into the markets, has seriously harmed scheme's chances of matching their liabilities.

Economic rescue plan a 'double-edged sword' for pension schemesLong-dated government and corporate bond yields crashed overnight by 0.3 per cent at the end of last week, increasing the value placed on pension scheme liabilities. The long-dated gilt index, used by schemes as a benchmark, saw its gross redemption yield fall from 4.62 to 4.34 per cent.

The reference point used for the calculation of pension liabilities in company accounts under IAS19 rules has also been affected, with the equivalent yield on high quality sterling corporate bonds falling from 6.82 per cent to 6.55 per cent.

Due to the changes, Hymans Robertson has estimated that the aggregate pension deficit of the FTSE350 companies under the IAS19 accounting standards has shot up overnight by £12bn, from £41bn to £53bn.

Patrick Bloomfield, an actuary and partner at Hymans Robertson said that pension schemes have been the casualty of the Bank's injection of financial adrenaline into the UK economy.

"Long dated gilts are the assets pension schemes would seek to buy to match their liabilities. The price of buying these matching assets has been pushed up by the Bank of England creating money," he said.

"The glimmer of hope for pension schemes trying to meet the bigger deficits created by quantitative easing is if the policy successfully feeds through to better corporate profitability and higher equity values. Whether this is achieved remains to be seen."

Barings Asset Management is also concerned about the potential effect on pension funds, and has therefore called for immediate suspension of the FRS17 accounting standard. This, it says, will avoid significant damage to corporate pension schemes and balance sheets.

Toby Nangle, director in the multi asset team at Barings, said: "The Bank of England's adoption of quantitative easing looks, on first sight, to be unambiguously good news.

However, falling corporate borrowing rates are a double-edged sword under FRS17 pensions accounting: with a lower financing rate for new investment comes a lower discount rate for calculating the present value of defined benefit pension liabilities. In a world where pension funds have few bonds and many equities, quantitative easing could have the effect of inflating the present value of defined benefit pension scheme liabilities, boosting deficits, and eroding the quality of corporate balance sheets," he warned.

- Pensions Age March 2009

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