Companies could be forced to funnel another £250bn into their final salary pension schemes over the next decade because of ultra-low interest rates and QE, according to a report.
The research, by Fathom Consulting and the Pension Insurance Corporation, warns that quantitative easing - the Bank of England's policy of printing £375bn of newly-minted cash - could mean firms have to divert the colossal sum, which would eat up virtually all their surplus earnings, to shore up their retirement funds, the Daily Mail reports.
This is on top of £135bn they have already ploughed into funds in the past three years due to ‘financial repression' - an economists' term for measures such as QE that governments use to reduce their debts, at the expense of savers and pensioners.
Admittedly, this is a worst-case scenario. But it is still one to send a chill down the spine of pension fund members and of companies facing ever-increasing bills for their final salary pension schemes.
It is also a frightening prospect for the rest of us, as channelling sums of this magnitude into pension funds would act as a severe drag on growth.
‘Huge sums have been paid out by UK corporates in an effort to close pension deficits, with very little to show for it. This is money that could have been productively invested in jobs and developing business,' said Mark Gull of Pensions Insurance Corporation.
It is no secret that Britain's final salary pension schemes have been on the critical list for years. Unfortunately, the response by the authorities to the financial crisis has only made matters worse for them.
QE has driven down long term interest rates - which are used as a benchmark by pension funds to work out how much money they will need to meet their commitments to retirees - to considerably lower than they would have been otherwise.
The lower the long-term rate, the more the funds need to have in the pot. In theory, this should all balance out, because QE pushes up the value of risky assets such as shares.
In practice however, funds have instead increased their holdings of less risky assets such as gilts and bonds, which has made the problem worse.
Advocates of QE argue that without it we would have suffered a far deeper slump.
But Danny Gabay of Fathom Consulting, a former Bank of England economist, gives this short shrift. ‘Counterfactual scenarios like this are the darkest of the dark arts. They say we would all be homeless and penniless without it. But it is like saying: "It would have been worse if we hadn't made it so bad."'
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