The evolution of pension deficits with and without quantative easing (QE) would have been broadly similar, with the overall movements in assets roughly matching that of the liabilities, according to Bank of England deputy governor for monetary policy and member of both the Monetary Policy Committee and Financial Policy Committee Charlie Bean.

Speaking at the National Association of Pension Funds’ Local Authority Conference in Gloucestershire, Bean discussed the aims of the QE programme and he noted that earlier BoE research found that the first round of QE reduced gilt yields by around one per cent and boosted equity prices by around 20 per cent.

Bean said that a pension fund holding a mix of bonds and equities that was in balance at the beginning of 2007 would have seen a large deficit emerge during the worst of the crisis, as equities plunged and then fall back as equity prices rallied during 2009, before re-emerging in late 2011 and early 2012.

Based on the BoE estimates of the impact of QE on asset prices, he estimated the path the deficit would have followed if the MPC had not undertaken any QE, nothing that gilt yields would have been higher and equity prices lower.

Many funds were already in deficit at the beginning of 2007, with an average deficit of 30% of total liabilities, and Bean said that in such circumstances “QE widens the deficit from the start of our purchases in early 2009 onwards, and by the end of the period has raised it by about 10% of initial liabilities”.

He concluded: “The change in the deficit is certainly not trivial for a substantially underfunded scheme, the impact of QE is nevertheless small compared to the movement in the deficit associated with other factors, such as the collapse in equity prices as a result of the financial crisis and the recession. In particular, it would be an error to attribute the deterioration in pension deficits since the start of the crisis solely to the impact of QE.

“The second observation is that QE does not inherently raise pension deficits. It all depends on the initial position of the fund. If a fund starts off relatively “asset poor”, the sponsors will now find it more costly to acquire the assets necessary to match its future obligations.”

With regard to the impact of QE on yields, he noted that this “should ultimately reverse when the economic environment improves and we start to sell the gilts back to the market in order to withdraw the present exceptional monetary stimulus. Unfortunately, with the present heightened uncertainty associated with the problems in the euro area, the likely future date for us to commence selling gilts has receded somewhat”.

He said that it may be tempting to conclude that the abnormally low yields are mainly caused by QE and that the right approach is to just look through the associated rise in deficits. However, he warned that pension funds and their sponsors may “have to contend with low yields for some considerable time yet”.

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