A paper published on 23 August 2012 by the Bank of England (BoE) concludes that the Bank's asset purchase programme (QE) has had a broadly neutral impact on pension funds and annuity income.

Regarding the impact of QE on pensioners, the Bank of England comments that the incomes of those already drawing a pension before QE began will have been unaffected. It adds: 'The implications of QE for those approaching retirement and for pension providers depends on the type of pension scheme and how well it is funded.'For those approaching retirement in 'defined contribution' schemes, the Bank says that lower gilt yields as a result of QE have reduced annuity rates.

However, the report points out that it is crucial to allow for the fact that the QE has raised the value of pension fund assets too. It says: 'Once allowance is made for that, QE is estimated to have had a broadly neutral impact on the value of the annuity income that can be purchased from a typical personal pension pot invested in a mixture of bonds and equities.'

The paper, entitled The Distributional Effects of Assets Purchases shows that QE also has a broadly neutral impact on a fully funded 'defined benefit' scheme. Moreover, it says that the pension incomes of people coming up to retirement in a defined benefit scheme, whether fully funded or not, will have been unaffected by QE. But, it adds that schemes that were already in substantial deficit before the financial crisis are likely to have seen those deficits increased.

The paper notes that the main factor behind increased pension deficits and falls in annuity incomes has not been the Bank's asset purchases, but rather the fall in equity prices relative to government bond prices. This fall in the relative price of equities was not caused by QE.

The paper forms part of the Bank's response to a request by the Treasury Committee for the BoE to explain the costs and benefits of its policy actions, in particular to groups that are perceived to have been negatively affected.

This article first appeared in UK Financial Services News, Wolters Kluwer Financial Services Europe