The Bank of England has told pension funds to stop blaming low interest rates and quantitative easing for their measly returns and ballooning deficits.
Ben Broadbent, deputy governor of the Bank with responsibility for monetary policy, said this morning that without the Bank’s swift rate-cutting action in both 2009 and more recently in the wake of the EU referendum, the woes facing long-term investors would be even greater. He also reiterated his – and the Bank's view – that the UK economy has performed stronger than expectations in the wake of the referendum.
“If the monetary policy committee (MPC) and other monetary authorities hadn’t eased policy,” Broadbent said this morning, “the performance of the economy and equity markets, and the long-term prospects for pension funds, would probably have been worse”.
Broadbent said that by restoring confidence in the UK economy and helping to cushion the effects of slowdown, it is too simplistic to say the fact that bond yields crash means pension deficits grow.
“An independent easing in monetary policy tends to push up the prices of all assets, equities as well as bonds. So it seems an unlikely candidate for the divergence that has been the key problem for defined-benefit schemes,” Broadbent noted.
The deputy governor also said the clamour to digest information as proof of an impending Brexit collapse or as vindication for voting to leave was unhealthy.
He said: “Every bit of economic data is scrutinised for the impact of the vote to Leave the EU. If it’s more positive than expected immediately beforehand, this is said to confirm the wisdom of the decision. A negative surprise and we’re meant to conclude it was a bad idea.
“This is, to say the least, a stretch.”
Instead of one clear indicator of how the economy is performing, Broadbent said any post-referendum slowdown will only become clear over the long term.
“Uncertainty … raises the bar for all decisions – disinvestment and new investment alike. So a lack of clarity about the UK’s future trading relationships needn’t result in visible, headline-grabbing closures of productive capacity. The effect is likely to be more insidious: decisions to expand, that might otherwise have been taken, are delayed.”