Friday, August 3, 2012

Pensions (and real economy) face "death spiral"

Pensions face a 'death spiral' as a result of quantitative easing and zero interest rate policies says Ros Altmann in a Telegraph article.

Regular readers are not surprised by this conclusion as your humble blogger has been talking about the unintended consequences of central bank policies that create headwinds that undo any benefit that can be achieved from extraordinarily low interest rates.
The Bank of England's policy of quantitative easing has done "irreparable damage" to Britain's final salary pension schemes, a leading economist has said.... 
its policy of forcing down long-term interest rates has caused huge problems for the pension schemes of many firms, according to Ros Altmann of Saga, the over-50s' group. 
Pension deficits at FTSE 100 firms have more than doubled in the last year alone, despite companies pumping millions into their schemes to repair their pension shortfalls, Ms Altmann said. 
"This is turning into a 'death spiral'," she added. "The lower gilt yields fall, the worse pension deficits become. The worse pension deficits become, the more trustees will feel they need to 'de-risk'. This often means buying more gilts which itself means worse deficits because trustees are competing with the Bank of England, which is also trying to buy gilts due to QE."... 
"Firms are left trying to find more money to plug pension deficits, causing funds to be diverted from creating jobs and expanding operations
Worryingly too, companies trying to borrow money to expand, or to meet a pension recovery plan, are finding the banks increasingly unwilling to lend because of the pension deficit." 
This vicious circle must not be allowed to continue. Artificially inflating pension deficits is hampering economic recovery.
Please re-read the highlighted text as she describes a death spiral in which funds that could be used to grow the economy are instead fed into the pension funds and from there into government debt securities.

Bottom line:  central banks are making the problem of excess debt in the financial system worse by contributing to the diversion of funds that are needed for growth in the real economy.

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