Pension Funds Face Torrid Market Conditions

It has been a difficult year for pension funds. Interest rates are at an all time low and the weakness in the stock market has led to a huge reduction in returns. The introduction of Quantitative Easing last month will also have a knock on effect of reducing annuity rates. This combined with spiralling transaction costs imposed by the Banks and the risk of further transaction costs proposed by the EU lead to a very miserable outlook for pension funds. We can certainly expect a cut in pension income under the current climate. 

Pension funds cannot afford to place too much reliance on the stock market as this is showing little sign of recovering soon. Pension funds are now exploring a variety of new schemes. Government proposals for Bonds to be issued by the private sector hold merit as this will enable Pension funds to move away from the current methods which are clearly not working effectively. Perhaps we will see a new breed of Pension funds emerge in the future.

Government Should Focus on Small Business

There has been significant debate over how to overcome the current economic woes in the UK. The government sought to stimulate the economy through quantitative easing last month with limited success. 

The importance of small business has been overlooked as SME’s account for almost half the UK economy and half of the employment in the private sector. The government should therefore seek to direct its resources to stimulate small businesses who, in turn, will drive the economy out of recession. At present, small and medium sized businesses are struggling to obtain finance from the banks and this is stifling growth in the UK. 

Recent proposals to encourage the private sector to issue bonds does have some merit as this will reduce our reliance on the greedy banks. However it will be difficult to implement such a scheme and it is expected that only larger corporations will be able to successfully issue bonds. Tesco have recently encountered difficulties in launching their own mortgage scheme which provides an indication of the difficulties involved. 

Perhaps we will come to rely on some of the larger Utilities companies and pension funds to issue Bonds to the private sector and to stimulate the economy.

Effects of Quantitative Easing in the UK

Last month, the Bank of England announced plans to £75bn quantitative easing (QE) to be introduced into the UK economy. Belsize look at the likely effects this will have on the UK economy. On the positive side, pumping £75m cash into the economy should help to stimulate the recovery. Introducing more money into the system should serve to increase consumer spending and stimulate the county’s growth and GDP. The announcement has immediately had an effect on the stock market which rose 3.7 percent the following day. Previous experience suggests that the Pound is expected to weaken as the effects of QE come into effect over the next few months. This is positive news for exporters but negative on the whole for importers. If QE works as planned, the stock market revival should counter and prevent any significant devaluation of the Pound.

The Bank of England have previously cited QE as being used as a “last resort”. This is because introducing more money into the economy (effectively printing more money) will give rise to inflation combined with the aforementioned currency devaluation. The two combined give rise to a double whammy as it will cost more to import goods into the UK, leading to further inflation. Savers will be hardest hit because the purchasing power of their money will be reduced as inflation kicks in. Pension funds will also be hit as QE is likely to lead to lower annuity rates.