The UK’s former pensions minister has called for MPs to launch an inquiry into company pensions, saying they have been pushed into a funding crisis by measures taken by the Bank of England.
Baroness Altmann said the low interest rate environment and other Bank of England measures designed to stimulate the economy had already helped push up corporate pension deficits to almost £1tn.
This was because the Bank’s bond-buying programme, known as quantitative easing, was pushing down the yields on UK government bonds, which “defined benefit” pension schemes use to price their liabilities, and was thereby inflating their deficits.
Baroness Altmann warned that the Bank’s decision last week to cut interest rates to 0.25 per cent and launch a new £70bn round of asset purchases, would push more schemes “over the edge”.
“Post-Brexit you already had a spike in gilt yields which was damaging for pension schemes and moved deficits closer toward the £1tn mark but the latest round of QE will push them even closer,” said Baroness Altmann.
“The Bank wants to stimulate the economy by bringing down interest rates, but the Bank is not acknowledging the negative impact these measures are having on pension deficits, and neither is the government.
“We need a national inquiry by MPs so they can look at the damage QE has done to pension funding and it needs to look at the ways that the damage can be mitigated.”
The Bank of England declined to comment on Baroness Altmann’s remarks. But in its inflation report published last week, it said that it “fully” recognised that a long period of low interest rates put savers in a ‘very difficult position’ which could result in bigger institutional savers moving to riskier assets.
BoE said its measures would support the economy, and “makes it less likely that we will have a very long period of high unemployment, low output, and very low interest rates.”
The government said it was ‘well aware’ of the stresses affecting the defined benefit sector and had been exploring what more could be done to secure the best possible outcomes from the considerable sums being invested in these schemes.
But it said any potential changes to the current framework would need to be considered very carefully.
“We have a robust and flexible system for regulating occupational pensions,” said a spokesperson for the Department for Work and Pensions.
“Problems are far from universal, with most deficits managed appropriately. Having strong, sustainable employers and a buoyant economy are the best protections for pensions, and the Bank of England’s announcements last week will help support us as we adjust to a new relationship with the EU.”
Baroness Altmann’s call came as the total deficit of the UK’s 6,000 private sector defined benefit pension schemes climbed by £24bn last month, as gilt yields fell to record lows, according to Pension Protection Fund estimates.
“The emergency to pension schemes has been caused by QE,” said Baroness Altmann. “Without QE deficits would not be so dire. I do think pension funding has reached crisis point, but there is no sign anywhere that this is being taken seriously.
“I don’t see how it is reasonable to ask companies with pension schemes to fill a £1tn hole and put money into their businesses as well. It doesn’t add up.”
Baroness Altmann said the government should consider measures to help employers struggling to afford increased pension contributions.
“What we should be doing urgently is offering people with small pension entitlement cash to transfer out,” said Baroness Altmann. “This will help reduce deficits.”
Baroness Altmann said the government could also issue special bonds to pension schemes, to help them match their liabilities.
She said the government could also introduce a statutory override which would make it easier for schemes to switch to a less generous annual uprating of pension payments.