Clive Fortes, Partner, on the impact of QE3 on pension schemes:
“While QE might have beneficial impacts in terms of reducing the cost of Government borrowing and boosting money supply in the economy, the flip side of this is that the yields available from UK gilts have plummeted to levels not seen since the late 1800s. For pension schemes in search of stable yields, that is not good news. Having said this, we expect that this third dose of medicine will have considerably less impact than the 1st or 2nd dose. What we do expect, however, is that QE3 will extend the period before we might see gilt yields rising to even the levels seen 12 months ago. We therefore think that companies will face a long slow process of restoring the funding position of their pension schemes. As a result, companies and trustees need to reassess their funding and investment strategies.”
Patrick Bloomfield, Partner, on the impact of QE3 on annuities:
“Quantitative easing may sound like a matter only for economists, but the effects of it could impact on anyone approaching retirement, or already drawing a pension. QE3 could cause interest rates to fall, which in turn would likely lead to higher inflation. While a lower cost of borrowing is good for younger workers looking to get on the housing ladder, it’s bad news for savers, and also people looking to buy an annuity as they approach retirement. Insurance companies use the yields on bonds to set the price of annuities, but QE may see a drop in those yields, meaning annuities become more expensive, and offer less money per year to retirees.
If higher inflation happens as well, then retirees will need to think carefully about whether they should be inflation-proofing their retirement income. Most annuities offer either a flat rate, or an annual payout that increases with inflation. Retirees who opt for the latter would likely benefit as a result of a new round of QE, while those who haven’t are likely to suffer the effects of higher inflation reducing their spending power.”
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