The European Central Bank announced on Thursday that it would soon kick off its massive quantitative easing program.
Pension consultants say the move will likely push the funding ratios of UK pensions lower – with one consultant going so far as to say the QE program would be “horrendous” for pensions.
The steep fall in yields on UK bonds, with more possibly to come, has left unhedged pension funds nursing bigger deficits because actuaries use the yields to calculate pension liabilities. And actuaries’ valuations determine the contributions companies need to make to pension schemes. When interest rates fall to extremely low levels, any changes have a significant impact on the size of liabilities.
Dawid Konotey-Ahulu, co-founder of consultant Redington, said: “The sustained decline in long-term interest rates has had a catastrophic effect on unhedged pension schemes. Prepare for a set of truly horrendous funding levels when some pension schemes run their calculations in March.”
Liabilities have risen 25% in a year, according to consultancy Hymans Robertson. Partner Jon Hatchett said they had risen 2% in the past 10 days alone: “They’re going up by the day. It’s astonishing.”
Mercer partner Alan Baker said liabilities at large UK companies’ pension schemes were up by £93 billion, or 14%, over three months.
Roughly 45% of UK scheme liabilities are protected through interest rate hedges, but other schemes will suffer.
One manager of a large UK pension scheme said: “I just wonder whether real yields can go any lower, so schemes will be exploring other ways to hedge. Just remember the silver lining though – if rates are so low then companies can raise capital cheaply and continue to support their schemes – even though the endgame is probably further out.”
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