Pension funds’ asset policy raises question marks over QE stimulus

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Most British pension funds cannot shift significant sums into riskier assets, even when faced with record-low bond yields, a top industry representative says, raising questions about the effectiveness of the Bank of England’s policy stimulus.

The BoE says that its £325bn of quantitative easing does more to help the economy than just reduce government bond yields because it encourages investors to put money into higher-return assets that fund private sector investment.

But Joanne Segars, chief executive of the National Association of Pension Funds, said this did not reflect the experience of her members, who collectively manage about £800bn of assets.

“There is a ‘rational economic man’ thesis that runs through a lot of what is talked about as the response to QE, and funds aren’t necessarily in a position to be those rational economic actors,” she said.

“For a pension fund to turn that around, and say ‘We’re suddenly going to invest in equities’ is just not the way in which pension funds have been moving in the past few years,” she said.

She was speaking shortly after the Deputy Governor Charlie Bean had given a speech at a NAPF conference in which he said the central bank’s initial round of QE had lifted share prices by around 20 per cent, as well as lowering gilt yields.

Employers’ pension schemes that are committed to paying staff a fixed pension on retirement have been under regulatory pressure to ensure they hold assets that closely match their liabilities – encouraging them to favour fixed-income investments rather than shares.

Ms Segars’ comments do not imply QE is wholly ineffective, as other investors may switch into riskier assets when they sell gilts, even if pension funds do not. But they may fuel concerns about QE at a time when the International Monetary Fund has called on UK authorities to investigate buying assets other than gilts to stimulate its struggling economy.

A NAPF survey of local government pension funds conducted earlier this month showed that just one in four were planning to increase shareholdings as a result of the BoE’s QE policy, compared to more than half who did not plan to change policy, and one in 10 who wanted to buy more gilts.