01 November 2015

Financial Times: QE ‘acted like an opaque tax’ on pension funds

QE might have prevented a re-run of the Great Depression of the 1930s, but around six in 10 pension funds say the central bank support has had a negative impact on their funding ratios, a measure of pension assets to obligations.

More than half of pension funds also say the influx of central bank money has sown the seeds of the next financial crisis, according to a study of 184 European pension funds collectively managing more than €1tn of assets.

The study points out that most EU countries now have high debt levels compared with their gross domestic product. Amin Rajan, chief executive of Create Research, the consultancy that carried out the research with French asset manager Amundi, says QE has been a factor in driving up this debt.

Investors also believe bond-buying by central banks has “acted like an opaque tax” on pension funds by inadvertently increasing their liabilities. This is because the price of bonds increased after governments snapped them up on the back of QE, forcing fixed income yields down in the process.

In Europe, more than 20 per cent of sovereign debt now has negative yields, according to the report, making it harder for pension schemes to meet their return targets.

Mr Rajan says pension funds “are in a very difficult situation at the moment” because of QE. “Regulators need to step in and come up with new measures,” he says, such as giving pension funds more time to raise money to meet their liabilities.

The study shows that only a third of retirement schemes have a funding ratio of more than 100 per cent, meaning their assets outweigh their liabilities. More than a quarter have a funding level of below 80 per cent.

To improve funding levels, two-thirds of pension schemes have set a target return of 5 per cent. The remainder are aiming for even higher returns. Create believes this will be a challenge, given that more than 50 per cent of pension schemes’ assets are invested in low-yielding fixed income instruments.

To achieve this level of returns, pension funds are also pushing into riskier assets such as equities, although there are concerns that these asset classes are overpriced.

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