Why does qe affect pensions

Why the U. S economy may surprise in the medium term. Reasons a currency war could still be on the horizon. The Netherlands approaches crisis. Cyprus: Now the real work begins. The new Ivorian economic miracle, finally? Close Window Loading, Please Wait! This may take a second or two. QE affected pension deficits because the attendant low interest rates mean the returns pension funds earn from investments in bonds and cash fall, contributing to the creation or expansion of the deficit.

The central bank estimates that QE caused the yield on UK government bonds to fall by 1 per cent. However the Bank of England said it believes the impact on the economy has been minor, because investment levels would have been lower still if it had not used quantitative easing to stimulate economic activity, boosting economic growth.

The working paper was produced for the central bank by Philip Bunn, senior economist at the Bank of England, Paul Mizen, a professor of monetary economics at Nottingham University, and Pawel Smietanka, an economist at the Bank of England.

The central bank added that the main reason the impact on business investment has not been starker is that pension deficits have been allowed to grow. Choose your subscription. Trial Try full digital access and see why over 1 million readers subscribe to the FT. For 4 weeks receive unlimited Premium digital access to the FT's trusted, award-winning business news. Digital Be informed with the essential news and opinion. Delivery to your home or office Monday to Saturday FT Weekend paper — a stimulating blend of news and lifestyle features ePaper access — the digital replica of the printed newspaper.

Team or Enterprise Premium FT. In its annual report, it expressed concern about the level of investment risk to which Irish DB pension schemes are exposed. Risk management and diversification away from volatile equities should certainly be encouraged and supported.

However, now is a very expensive time to reduce risk by increasing allocations to euro zone bonds. De-risking in this form, while QE is influencing the market, will likely have a permanent impact on pension benefits through benefit reduction or a forced move away from DB schemes.

The regulatory framework should ideally take account of the unprecedented market conditions Irish schemes face due to QE and allow schemes that are well managed, have defined risk management strategies and are sustainable over the long term to navigate the current short-term challenges. Unfortunately, there appears to be little sign of pragmatism or even acknowledgement that we going through extraordinary market conditions.

Accordingly, it falls to trustees and sponsors to make sensible risk management decisions and do their best to plot a course for the long term while managing short-term financial challenges. Please update your payment details to keep enjoying your Irish Times subscription. Quantitative easing creates new challenges for pension schemes Trustees of DB schemes must take account of distorted market conditions Mon, May 4, , Paul Kenny.

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