Clients have probably read that the yield on some gilts have turned negative (www.bbc.co.uk/news/business-37031793). In part this is down to the flight to safety by investors following the surprise vote to leave the EU. But the situation has been compounded by the Bank of England’s decision to loosen monetary policy, specifically by adding to its Quantitative Easing programme.
The key economic question is whether this will add life to a UK economy in need of support. Perversely, it is possible that the monetary policy medicine will do more harm than good, as the implied severity of the economic situation rings louder in investors’ ears.
Besides the general shock to confidence that negative rates can have on bemused savers, it will drive up the value of pension scheme deficits. This will likely lead to the need for additional deficit contribution payments to be paid into schemes, at the expense of wages and/or capital projects.
An important question for Trustees is whether LDI protection against further falls in yields is warranted or whether this situation will add weight to the argument that monetary policy has run its course, and that fiscal stimulus should step up to the plate (www.theguardian.com/business/2016/aug/10/why-the-banks-bond-buying-failure-may-not-be-just-a-blip).
Baroness Ros Altmann, former pensions minister, has called for a a national inquiry. She says that the measures taken by the Bank of England have pushed UK pensions further into a into a funding crisis!
Our view: in short – the sooner the better, unless The Bank can find smarter ways of implementing its policies. Also, the Pensions Regulator should clarify whether this development falls under the definition of volatility in its recent statement (www.thepensionsregulator.gov.uk/press/pn16-35.aspx).
No doubt this will be a notable topic of discussion between clients and consultants over coming weeks and months. If you have comments on this issue, please send them to quip@quantumadvisory.co.uk
The QuIP Team
11 August 2016