The unexpected impact of Quantitative Easing

Today the Bank of England celebrates (if that's the right word) the third anniversary of the decision to start quantitative easing, the - largely experimental - exercise which has injected an enormous £325 thousand million into the economy.

The Bank has also slashed interest rates to historic lows in an effort to rev some life back into the UK as the financial crisis gathered pace.

With the government's options limited by very tight budgets it has fallen to the Bank to enter in to managing growth - and the jury is still out on the success its actions have had.

But there is mounting evidence of the unhappy side effects the Bank's first aid has wreaked on some parts of society. I have reported before on the dramatic falls in retirement income from annuities.

Today a body representing pension funds in the UK (NAPF) reports that the second round of QE over the past six months alone - amounting to £125 billion - has knocked a whopping £90 billion off the value of pension funds in final salary schemes, compared with what they will have to pay in future.

This is because of two effects: QE pushes down yields (interest rates) on government bonds - which are bought by pension funds.

Lower interest rates means lower income from the new bonds bought by the funds. QE also affects the way the funds' liabilities are calculated, making them more expensive.

The combined effect, according to the NAPF, is the £90 billion which has contributed towards a more than doubling of pension fund deficits from £117 billion in August to £265 billion now.

A year ago the funds were in surplus by £38 billion.

This is an enormous sum and the NAPF describes the consequences for pension schemes as ‘severe’.

Because they are required to pay in to schemes with a deficit, companies may switch from investing in jobs and close more final salary schemes.

The NAPF is calling for changes to rules to allow the funds more time to make up shortfalls.

The NAPF themselves make clear they have supported QE as a means of stimulating the economy but that there needs to be action now to tackle an issue which will be around for a long time to come.

The broader question which we will be returning to for some time to come is the impact of QE on other parts of the economy.