The impact of quantitative easing (QE) on pension funds is exaggerated as UK gilt yields have declined only marginally compared to government bond yields in countries without QE since the start of the financial crisis.

Towers Watson asserts QE is more likely to have averted a worse economic downturn and the subsequent failure of pension fund sponsors. Instead QE has benefited the PPF and given pension funds extra time to execute flight plans, it said in its October Global Markets Overview.

“Many commentators are suggesting QE by the BoE has led to a significant fall in index-linked gilt yields,” said Towers Watson head of investment strategy Alasdair MacDonald. “We do not share this view and would urge funds not to use this as an excuse for inaction.”

“The effect of QE on UK pension funds needs to be viewed holistically and while the recent BoE figures are a helpful upper estimate of the impact on bond yields, they make no allowance for what might have happened anyway without QE.”

The NAPF estimated QE had increased pension fund deficits by £90m, before the additional £50bn of QE was announced in March. The NAPF called on UK Chancellor George Osborne to allow pension funds to add a small margin to their discount rate, to reduce scheme deficit figures.

Russell Investments director of consulting EMEA Crispin Lace agreed QE has left pension funds in an ‘unenviable’ position: “The yield used as a basis for valuing their liabilities has clearly been artificially depressed whilst the value of their diversified asset portfolio has not increased to the same extent.”

But MacDonald said low bond yields simply reflect investor concern about the break-up of the euro zone. He recommends trustees of sponsoring employers heavily exposed to Europe should de-risk to ensure the pension fund remains solvent while markets are irrational.

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