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Quantitative Easing - good or bad (or both) for your UK Pension Fund?

By Robert Burns BA (Hons), FCCA , Cert PFS - Mon 24th Oct 2011

A couple of weeks ago, the Bank of England (BoE) surprised the financial markets by announcing that it was embarking on a second round of quantitative easing (QE).

QE is achieved by the BoE (which is owned by the Government) buying Government securities (Gilts or debt issued by the UK Government). The sellers of these gilts will mainly be UK insurance companies and pension funds which hold them as investments.

The money used to buy these securities is created electronically, literally at the press of a button. The idea is that the money created will be deposited by the recipients in their respective bank accounts in return for the gilts they sell to the BoE. This increases bank reserves and the ability of banks to lend to UK businesses. The money will eventually be ‘spent’ by the recipients (on shares for example).

So - the ability of banks to lend is increased, the supply of gilts falls (as they will become ‘owned’ by the BoE) and the price of shares will increase. Well that’s the theory. The problem is that no one knows whether QE really works this way or indeed whether it works at all in terms of stimulating the economy beyond short term effects.

By raising the total amount of QE to a total of £275bn, the BoE will have purchased gilts to the equivalent of 19% of UK GDP, 32% of the total value of UK gilts issued, and 45% of the particular type of gilts the BoE will actually buy (maturities of 3 to 25 years). Such a vast sum of ‘asset purchases’ leaves less to buy in the open market, effectively pushing up the prices of gilts by draining their supply.

This is as far as your pension fund is concerned is a bit of a curate’s egg.

Good because it may increase the price of shares to some degree (or cause them to fall less than they might otherwise do so), and so pension funds invested in shares will tend to rise in value, or fall less.

Good and bad, for those with deferred (or frozen) pensions in final salary schemes, as pension fund liabilities rise (bad if the scheme is already in deficit) and transfer values will rise as well - good if the scheme is not in deficit and can afford to pay increased transfer values.

Good if your deferred pension is a public sector pension (like a civil service or teacher’s pension for example) as the increased scheme liability (and increased transfer values) are underwritten by the state.

Bad if you have a pension fund from which you are drawing income, as the amount you are able to withdraw will reduce and bad because of the increase in inflation that QE will cause.

One thing is for sure. It is more important than ever to have an expert eye cast over your UK pension fund as QE distorts the position. The ability to transfer a UK pension fund to a QROPS for example enables an investment strategy to be put in place that takes account of the QE effect.

For further information about QROPS and Pension Planning opportunities please contact us today by clicking the link Here and leaving a few basic details on the form at the foot of the page.

Comment on this Blog

Obviously bad if you are taking your pension as inflation is killing its purchsing power , interest rate should be the same as the euro's one, so easing the savers/pensioners pain of subsidizing the younger/govenments wast
Pottsy189 - Fri, 4th Nov 2011

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