Quantitative Easing Continues To Damage Pension Funds

The Bank of England’s (BOE) decision to print more money to help the economy has created significant side effects including rising inflation and a shortfall in private pensions. In summary, the BOE prints money and uses it to buy government and other bonds. This has the effect of increasing the demand for government bonds and so the interest rate offered for these investments falls to reflect the relationship between supply and demand.

Pension plan benefit liabilities are valued with reference to the interest rates available on government bonds. The lower the interest rate the higher the value of the liabilities of the scheme.  The return on the pension scheme assets on the other hand will be reduced by the inflationary effects of Quantitative Easing (QE). Therefore pension funds are faced with the prospect of a fall in asset value combined with an increase in the pension scheme liabilities, thereby creating a pensions black hole.

Savers have been having a hard time recently. The continued QE and rising inflation has hit pension funds hard and low interest rates mean that it is difficult to earn a reasonable return on your investment. So what can be done? Unfortunately we cannot control whether the BOE or the FED or the ECB continue to print money. In fact we are resigned to the fact that they are likely to print more money soon as both the US and Europe have pledged to embark on programmes of ‘unlimited QE’.

We recommend that you look at the one aspect that you can control (to an extent), and that is the return on your pension fund. If you are not doing so already you should be monitoring the returns on your investments. Most pension funds provide online access whereby you can review the performance of your plan. If you are using a fund manager and are not happy with the performance then consider changing them. There are regular reports in the media that suggest fund managers are investing in bonds that will generate very low and even negative returns. There is a chance that your pension is being managed by these fund managers and if so you should seek to change.

Certain SIPP pensions offer significant flexibility in the range of methods you can use to invest your funds. Also, given that pensions are adversely affected by inflation you could diversify that risk by investing in gold funds. This is a natural hedge because the price of gold should increase in the event of QE and inflation and so the gold miners are likely to benefit.

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