Pensions: Quantitative Easing hits pension funds for £90 billion


The National Association of Pension Funds (NAPF) has released figures which show the Bank of England’s program of Quantitative Easing (QE) has knocked a further £90 billion off the value of final salary pension funds.

The Bank of England’s QE program started over three years ago and has been deployed at various times since then to try and help the ailing economy. The QE program now stands at £325 billion having been extended by a further £50 billion last month.

Final salary scheme deficits

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One of the side effects of QE is that the value of government bonds, known as gilts, rises, whilst the income they produce falls.

This has caused significant problems for final salary pension funds who are big buyers of gilts, and have had to spend more money buying gilts for a lower return. This rise in price and fall in yields has pushed up the size of final salary pension scheme deficits by £90 billion over the past six months according to the NAPF.

According to figures from the Pension Protection Fund (PPF) the UK’s 6,533 final salary pensions had a collective surplus at the end of 2010 of £22 billion, 12 months later this had turned to a deficit of £255 billion.

Joanne Segars, Chief Executive of the NAPF, said: “Businesses running final-salary pensions are being clouted by QE.”

Segars continued: “Deficits that were already big now look even bigger because of its artificial distortions.

“Firms are legally obliged to fill the deficits, and that diverts money away from jobs and investment, and will lead to further closures of final salary pensions in the private sector,” she warned.

Lower Annuity Rates

Retirees with Personal Pension Plans are also being hit by the effects of QE.

An Annuity rates comparison shows that lower gilt yields have pushed down Annuity rates significantly over the past year forcing retirees to accept a permanently lower income.

However, whilst an Annuity rates comparison shows a fall in Annuity rates, the Bank of England believe that the effect is overstated, and retirees have actually benefit from QE as their fund values have risen. Retirement experts are sceptical of this claim, pointing out that once an Annuity has been bought it can never be changed, forcing pensioners into lower incomes as a result of QE and falling gilt yields for the rest of their life.

The NAPF agrees, saying: “Falling annuity rates mean the average person with a pension pot of £26,000 retiring now would get 22% less income than if they had annuitised four years ago. This is a loss of £440 a year.”

Income Drawdown, the traditional alternative to an Annuity, has also been hit by falling gilt yields.

The maximum income available from an Income Drawdown plan, now called Capped Drawdown, is set by the Government Actuary’s Department and is known as the GAD rate. The GAD rate is calculated by taking into account gilt yields, which have fallen and consequently pushed down the maximum allowable income from a Capped Drawdown plan.

The fall in the GAD rate has also affected existing pensioners with Income Drawdown plans, many of whom have seen their incomes fall significantly at the mandatory reviews.

If you are concerned about falling Annuity rates or have an Income Drawdown plan our team of Independent Financial Advisers in Nottingham are experienced in developing retirement income strategies for clients the length and breadth of the UK.

If you would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email