Pension schemes will have to brace themselves for increased volatility in their deficit figures, because of quantitative easing, according to pension consultants.

The Bank of England introduced quantitative easing in March by buying back government debt, causing bond yields to plunge and FTSE 100 companies' deficits to soar to around £85bn. However, yields have risen steadily, and by the end of March yields were above those at the end of February.

Towers Perrin has calculated that the combined defined benefit (DB) pension fund deficit on the UK's top 100 companies' balance sheets is now around £60bn, £10bn less than it was in February.

"Quantitative easing is intended to help sooth the country's economic headache," commented Mark Duke, head of pensions at Towers Perrin.

"However, for pension plans, the impact may be anything but soothing. Rapid changes in bond yields, together with the unknown impact on long-term inflation, mean highly volatile funding levels. Employers need to make funding and investment decisions that reflect their view on the longer term impact of policies such as quantitative easing."

Deborah Cooper, head of the retirement resource group at Mercer, said that the effect on yields would depend on the demand for gilts and the behaviour of the Bank of England and the Debt Management Office. She warned that if yields did not recover and if trustees' investments did not provide higher returns then pension schemes would find themselves with increased liabilities and even further funding problems.

- Pensions Age March 2009

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