Bank of England failed to appreciate QE affects on pensions

Discussion in 'Economics' started by morganist, Oct 3, 2011.

  1. Does the link work. It worked for me the first time then it asked me to subscribe.
  2. News
    Bank of England failed to consider QE's impact on pension funds, says PIC
    28 Sep 2011

    UK – The Bank of England failed to consider the impact of quantitative easing (QE) on pension funds when it launched its £200bn (€230bn) stimulus package in 2009, according to the Pension Insurance Corporation (PIC).

    Speaking at a roundtable discussion, the PIC's co-head of asset liability management Mark Gull said the country's central bank committed a "sin of omission" and estimated that the targeted buying of gilts between March 2009 and January last year increased scheme deficits by more than £70bn.

    Article continues below
    Gull said QE was a "good, useful way" of stimulating the economy, but noted his surprise that the Bank of England (BoE) neglected to mention pension funds in its recent quarterly bulletin, which set out to measure the impact of quantitative easing.

    "Gilt yields define their liabilities, and the impact on those were not mentioned at all by the Bank of England – it's a sin of omission," he said, adding that the institution's lack of consideration was worrying.

    He calculated that scheme liabilities had increased by £74bn even if only taking into account the 100 basis point drop to gilt yields the BoE estimated resulted from QE.

    Gull added that, while this estimate assumed no increase in inflation, long-term inflation prospects should theoretically rise as a result of the stimulus.

    Jay Shah, co-head of business origination at the company, said: "The impact of QE has been diluted by the opposite impact it has on pension schemes."

    Gull said increased deficits meant companies would be forced to commit to higher deficit reduction payments, which in turn would be likely be committed to matching strategies rather than equity portfolios – again lowering gilt yields.

    He argued that, if a second round of quantitative easing were initiated, it should focus less on buying up gilts and more on investing in banks' corporate bonds.

    This would have the dual advantage of impacting pension schemes liabilities less and potentially encouraging financial institutions to lend more as their yields fell below those of non-financial corporate bonds, he said.

    Highlighting policies implemented by other countries, Gill referenced the US Federal Reserve's attempt to reduce the yields on long-term bonds.

    "That would be particularly inappropriate for the UK because that's where more pensioners are," he said.

    He conceded that it was an approach the BoE was "less likely" to take, as the importance of long-dated bonds on the US housing market was not mirrored in the UK.
  3. The link doesn't work, but if you google the headline and click on the first result, you get the article.

    At any rate, the guy is being disingenous (not surprising, given he's naturally biased). Firstly, the UK pension funds don't use gilt yields to discount their liabilities. That discussion is still ongoing and hasn't gotten anywhere. AA corp yield was still the used rate, last I checked. Secondly, what hurts the pension funds a lot more is the FTSE drop (both spot and expectations) and I figure that what the BoE maybe taketh away with the gilts, it giveth with the equity mkt. Thirdly, whose fault is it that these pension funds are running such large duration gaps? And, finally, just to illustrate, when QE first started and improved the funding position for these schemes, I don't remember hearing any complaints.
  4. Equities could rise again but the effect of QE is long term and will hit later. In short the effect on the stock market may be temporary but QE is not. Does anyone know where QE money went. They just say banks, which ones?
  5. This is what you have to google.

    Bank of England failed to consider QE's impact on pension funds, says PIC
  6. This is the extent of your ignorance of the subject matter: QE doesn't give a specified money to some specified bank. It's not how it works.

    Are we still talking about pension or in general? So is this one of your slippy method of talking about B while the conversation is on A so you can wiggle out of your glaring errors later on.

  7. No in Britain the QE was used to buy assets from banks and insurance companies. These assets are not specified. Nor who they bought them from. Whoever received the payment for the assets would have received a price that the market would not have paid at that time. So they benefited from it.
  8. What do you mean "these assets are not specified"? I know exactly how much they bought of each gilt/corp issue and that's not 'cause I am so special. The Bank makes this information publicly available. Furthermore, the assets were purchased on the basis of competitive mkt auctions, so I have no idea where you get the idea that the Bank of England overpaid.

    Again, whether you believe that QE has been effective or not is an entirely different question.
  9. Isn't QE necessary to make the oustanding debt payments back if nothing else.

    So who did they buy them from then?

    In relation to competitive market auctions. If they are putting in £200 bn in a short period of time they are going to push the price up.
    #10     Oct 3, 2011