The NAPF has given a qualified welcome to yesterday’s upgrade of the economic outlook and lowering of inflation expectation by the Bank of England governor Mervyn King.

National Association of Pension Funds (NAPF) investment policy adviser Helen Roberts said: “King’s final report is not a game-changer for pension funds because they take such a long-term view, but it is certainly welcome that the outlook for both growth and investment returns looks a little rosier. Many funds are really struggling with the low gilt yield environment, and they will be relieved that a further salvo of quantitative easing is now looking less likely.

“A stronger economy will benefit pension funds but, that said, UK growth is sluggish and inflation remains stubbornly above the inflation target of two per cent for this year and next. So conditions are likely to remain challenging. But this uptick in expectations is good news, especially after so many downgrades of UK growth forecasts in recent years.

Speaking yesterday during the press conference about the Inflation Report, the last before he retires next month, King said he understood concerns over continuing low base rates for pensioners and forecasts they would stay below one per cent for four years.

“I have great sympathy for them and indeed as a pensioner myself – having just acquired that status – I understand exactly why they are concerned. But I also think that the people who will suffer even more are the younger generation who, when trying to put money aside for a pension in the future, will find that to provide for a pension is extraordinarily expensive when interest rates are so low,” he said.

“I'm certainly not happy about the prospect that rates will stay low for so long. I would like to get back sooner rather than later to a world of much higher interest rates, more normal levels of interest rates. But it won’t be the lack of a wish to do that that creates the problem; it’s the state of the economy. And once the economy improves then it may be possible to raise rates sooner than the current market expectation.”

Much, he added, would depend on what happens in the rest of the world.

“If slow growth in the euro area persists and continues, that is going to make it much more difficult for us to get out of the difficulties that we have.”

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