Buying gilts and artificially driving down gilt yields which underpin both defined benefit and defined contribution pensions is causing significant economic damage, permanently impoverishing pensioners, is pushing up inflation and damaging consumer spending. Latest News. BoE plays down overall effects of QE on pension funds. Your browser does not support the audio element. So who's right? To answer this question, we need to have a look at the economics of pension fund valuation.
Pension fund assets are typically valued in two ways. One method is to just take the market value of the assets shares, bonds, property, and cash.
Another method is for an actuary to perform a detailed valuation, taking into account different time periods, interest rates, rents and dividends known as an actuarial valuation.
As far as Mr King is concerned, he may be thinking of the impact that QE has had on asset values. Without QE, as far as he is concerned, stock markets and bond prices might have collapsed. From this point of view, QE has actually been beneficial to pension funds. Given the rally in gilts and corporate bond prices over the last three years, there's almost certainly some truth to this argument. Yes, it's hard to quantify no-one really knows where the FTSE would have ended up without QE but it's certainly had an effect.
Where the issue becomes more contentious, is the impact that QE has had on the value of pension fund liabilities. These depend on things such as final salaries, life expectancy and future rates of inflation. Once estimated, these future liabilities are converted to values in today's money present values by discounting them at a rate of interest. The rate of interest used typically reflects the bond yields on good quality corporate bonds typically AA' rated bonds.
As QE has driven down the yields of government bonds , corporate bonds yields have gone down as well. The end result? The present value of many pension fund liabilities has increased the lower the discount rate, the higher the present value. Mr King may be right that other factors such as increased life expectancy have increased liabilities. But lower interest rates have had a very powerful influence.
And according to organisations like the NAPF, this effect has more than offset the boost to assets from QE which is why deficits the difference between asset values and liabilities are going up. Pension fund deficits are a big problem. Luckily for BT, it can afford to do this. But companies with less financial strength may struggle to deal with big deficits. You see, pension fund deficits are like debt - they are real liabilities that have to be paid. Big deficits have to be addressed and can seriously threaten a company's ability to pay dividends because cash has to go to pension funds rather than shareholders or even the solvency of the company itself.
Not to be deterred, Japan embarked on another round of QE in The Bank of Japan is committed to addressing persistent deflation through QE, and is also seeking to improve export competitiveness by lowering the value of the Yen. Again, it is too early to say if this will work. It appears the Japanese are once again not spending all those Yen. Some commentators have linked the sell-off in emerging markets in January to a withdrawal of this liquidity.
Emerging markets are not homogenous and those that have sold off have serious economic issues, so must be judged separately. In any case QE is necessarily tailor made to the particular challenges of the economy. The ECB has the uniquely particular challenge of operating a single monetary policy for the 18 economies that constitute the Eurozone. Notwithstanding that challenge, the ECB is operating an accommodative growth focussed monetary policy within the constraints of its mandate, and it has implemented non-standard liquidity operations.
Contact Lore Burkart 01 for further information. Please enable JavaScript to view the site. Viewing offline content Limited functionality available. My Deloitte. Undo My Deloitte. Quantitative easing Problem or solution? Save for later. Japan In Japan QE has been tried at least twice. The prognosis Will inflation become a problem with all this printing of money? As long as productivity continues to improve, spare capacity exists, and the labour markets remain weak, it is unlikely that inflationary pressures will emerge in the short term.
When they do emerge, central banks will presumably counter by tightening monetary policy. What does QE mean for savers?
0コメント