More UK QE Ahead Due to Growth Targets Says LGIM
02 May 2012 (PLANSPONSOREurope.com) – UK pension funds can expect an immediate respite from the effects for quantitative easing (QE) but not for long due to lower than expected growth, according to Tim Drayson, Economist at Legal & General Investment Management (LGIM).
Last month the National Association of Pension Funds (NAPF) said falling gilt yields have pushed final salary pension funds £90bn deeper into the red since the second wave of quantitative easing (QE) started last October.
And only last week the UK’s Pension Regulator said it will not make allowances for low gilt yields and quantitative easing in cutting funding targets
March’s report from the Office for Budget Responsibility predicted that the UK economy would grow by 2.0% in 2013 (revised down from 2.1% in November), picking up to 2.7% cent in 2014 and 3.0 per cent in the final two years of the forecast.
Economist James Carrick claimed that these figures were too optimistic and were informed by over optimistic expectations around global growth. He points to growth of around 1.5% between 2014 and 2016.
Drayson added: “We think there is certainly a possibility to get more QE later on this year. The Bank of England has signalled they are probably going to pause this month. If the data turns out as we expect and Europe continues then I think another round of asset purchases is likely.
“I think they [the Bank of England] will continue with pure gilts rather than trying to buy any private sector credit. They don’t really want to get involved in trying to distorting private sector pricing so on that basis you are going to keep yields down so annuity prices will remain subdued.
“Ultimately there is a risk that there will be somewhat higher gilt yields which will be bad news for those that have fixed income investment.”