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?
Diving in at the deep end is no excuse for shirking the style stakes
- 2 Loom bands: Bids for dress made from colourful rubber pass £170,000 on eBay
- 3 Why I'm on the brink of burning my Israeli passport
- 4 L'Oreal cuts ties with Belgium supporter Axelle Despiegelaere after hunting trip photographs
- 5 The true Gaza back-story that the Israelis aren’t telling this week
Sustained immigration has not harmed Britons' employment, say government advisers
War is war: Why I stand with Israel
7/7 memorial defaced on anniversary of 2005 attacks with ‘Blair lied thousands died’ graffiti
Australia facing international condemnation after turning around Sri Lankans at sea
Even when it brutalises one of its own teenage citizens, America is helpless against Israel
Socialist Worker called to apologise over ‘vile’ article saying Eton schoolboy Horatio Chapple's death is ‘reason to save the polar bears’
iJobs Money & Business
£70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...
£75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...
£60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...
£35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...