Plan Sponsors May Have to Contend With More QE

08 August 2012 (PLANSPONSOREurope.com) – UK plan sponsors may have to contend with rising defined benefit pension liabilities brought about by a further round of quantitative easing (QE).

Last month Mark Gull, co-Head of Asset-Liability Management at Pension Corporation, warned that up to £100bn will move from corporate sponsors to plug their pension deficits over the next three years. QE has come under fire as it causes pension fund defined benefit liabilities to increase.

According to Azad Zangana, European Economist at Schroders, further QE could be on the way: “The Bank of England cut its annual growth forecast to near zero for the end of 2012 when it published its inflation report this morning. The Bank of England is also forecasting inflation to be marginally below its target of 2% at the end of its forecast horizon - in the past has been a signal that the Bank is ready to ease monetary policy further. However, what makes this latest forecast more interesting is that not only does the forecast already take into account the latest round of quantitative easing and the government’s Funding for Lending scheme, but it is also assuming interest rates will be cut further. The Bank takes the money market forward curve for its assumption on interest rates, and this is currently assuming an interest rate cut by the end of the year.

“Could the Bank cut interest rates further? The Monetary Policy Committee has certainly been considering the option during its monthly meetings. We believe that the bank may choose to hold off cutting interest rates further, at least until it can fully assess the impact of the Funding for Lending scheme. However, we do expect the Bank of England to continue its quantitative easing programme beyond the £375bn of purchases currently planned.”

PLANSPONSOREurope Staff
editors@plansponsoreurope.com