"The Bank has been insulated from some of the negative impacts which the Bank of England's policies have inflicted on private sector schemes"
She says the Bank has been "insulated from some of the negative impacts which the Bank of England's policies have inflicted on private sector schemes" because taxpayers fund the employer contributions, while Bank of England employees do not contribute at all.
The Bank of England's pension scheme is invested entirely in bonds and has a deficit. The Bank has acknowledged that its pension scheme was damaged by falls in long-term interest rates and "clearly the latest round of QE will cause further problems", according to Altmann.
Altmann says the Bank of England's pension scheme shows that "just investing in gilts and bonds is doomed to failure" because it entails such huge employer costs and still carries deficit risks.
She argued that "such costs would be ruinous for most private sector employers struggling to fix their defined benefit pension deficits", adding that the latest round of QE will have worsened deficits again, increasing costs of running DB schemes and requiring further contribution increases.
She added: "This may help explain why the Bank of England seems so complacent about the pension problems created by its policies. However, the problems are real for most employers and may undermine the effectiveness of QE itself. These side-effects need to be taken more seriously."
The Bank of England says QE will impart monetary stimulus and "trigger portfolio rebalancing into riskier assets by current holders of government bonds".
However Altmann highlights that "even the Bank of England's own pension scheme is not switching to higher risk assets". She believes that most institutional investors, such as pension funds or insurers, do not take more risk due to regulatory constraints, and QE may therefore not be working as intended.
Altmann believes that the pension side effects should be "taken more seriously" by the Bank when assessing the effectiveness of QE, arguing that as well as increasing pension deficits, QE has also caused "potentially even worse damage to annuity rates".
Altmann explains: "This has deflationary effects. Firstly because companies cannot afford to buy-out their pension risks as the costs have risen so high and secondly because individuals buying annuities will have lower incomes for the rest of their lives. The combination of pension regulation and financial regulation is conspiring to magnify the negative impacts of QE and, in an aging population, this increases the likelihood that monetary policy is having side effects that undermine its efficacy."
