James Moore: Bank's efforts a problem for pension funds

Outlook There has been much gnashing of teeth about companies in Britain sitting on pots of cash that they refuse to invest. At least some of them might have a good reason for this.

If you've a multi-million pound pension funding deficit overseen by regulators with the power to push you into insolvency if you don't do something about it, the chances are that the pension scheme is going to take priority for any spare funds you might have.

Perversely, the problem is being exacerbated by the Bank of England's attempts to stimulate the economy by "quantitative easing" (QE) which has been likened to printing money.

This description isn't completely accurate. The Royal Mint's presses haven't been spitting out lots of new currency. The Bank has instead sought to increase the supply of money in the economy by buying assets. For the latter read Government bonds, or gilts.

This creates a big problem for pension funds because the valuations of their long-term liabilities are linked to gilt yields and the Bank's bond buying depresses these. Which makes pension schemes' funding deficits look bigger when they are valued.

The net effect? Companies have to divert money they might otherwise use for investment into filling black holes in their pension schemes. The Bank's attempts to stimulate the economy is making those holes bigger, calling into question its effectiveness as a stimulus, and heaven knows the economy needs a boost from somewhere given the Chancellor's tunnel vision.

The National Association of Pension Funds (NAPF) has a solution to this tricky conundrum: Let pension schemes use bigger numbers. Allow its members to add a bit on top of gilt yields when they value their funds to counter the effect of QE and hey presto: deficits magically get smaller, companies don't have to put in so much cash and can instead use it for investment. The economy gets a boost and everyone's happy! Lots of Europeans are doing this already (note to the NAPF – that doesn't necessarily help your case).

You've spotted the problem of course: The improvement in deficits will be an illusion. We've seen such slight of hand all over financial services and the results aren't pretty. It's true that there is rather a lot of smoke and mirrors about what the Bank is doing to try and stimulate the economy in the first place. But is it really such a good idea to add more goop to a cauldron that doesn't smell too good right now?

Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: £20000 - £25000 per annum + c...

Recruitment Genius: Account Handler - Personal Lines

£20000 per annum: Recruitment Genius: This provider of insurance and financial...

Recruitment Genius: Graduate Developer / IT Support Engineer

£16000 - £25000 per annum: Recruitment Genius: This fast growing financial ser...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250 ...

Day In a Page

Solved after 200 years: the mysterious deaths of 3,000 soldiers from Napoleon's army

Solved after 200 years

The mysterious deaths of 3,000 soldiers from Napoleon's army
Every regional power has betrayed the Kurds so Turkish bombing is no surprise

Robert Fisk on the Turkey conflict

Every regional power has betrayed the Kurds so Turkish bombing is no surprise
Investigation into wreck of unidentified submarine found off the coast of Sweden

Sunken sub

Investigation underway into wreck of an unidentified submarine found off the coast of Sweden
Instagram and Facebook have 'totally changed' the way people buy clothes

Age of the selfie

Instagram and Facebook have 'totally changed' the way people buy clothes
Not so square: How BBC's Bloomsbury saga is sexing up the period drama

Not so square

How Virginia Woolf saga is sexing up the BBC period drama
Rio Olympics 2016: The seven teenagers still carrying a torch for our Games hopes

Still carrying the torch

The seven teenagers given our Olympic hopes
The West likes to think that 'civilisation' will defeat Isis, but history suggests otherwise

The West likes to think that 'civilisation' will defeat Isis...

...but history suggests otherwise
The bald truth: How one author's thinning hair made him a Wayne Rooney sympathiser

The bald truth

How thinning hair made me a Wayne Rooney sympathiser
Froome wins second Tour de France after triumphant ride into Paris with Team Sky

Tour de France 2015

Froome rides into Paris to win historic second Tour
Fifteen years ago, Concorde crashed, and a dream died. Today, the desire to travel faster than the speed of sound is growing once again

A new beginning for supersonic flight?

Concorde's successors are in the works 15 years on from the Paris crash
I would never quit Labour, says Liz Kendall

I would never quit party, says Liz Kendall

Latest on the Labour leadership contest
Froome seals second Tour de France victory

Never mind Pinot, it’s bubbly for Froome

Second Tour de France victory all but sealed
Oh really? How the 'lowest form of wit' makes people brighter and more creative

The uses of sarcasm

'Lowest form of wit' actually makes people brighter and more creative
A magazine editor with no vanity, and lots of flair

No vanity, but lots of flair

A tribute to the magazine editor Ingrid Sischy
Foraging: How the British rediscovered their taste for chasing after wild food

In praise of foraging

How the British rediscovered their taste for wild food