Quantitative Easing Tough on Pensions

From the WSJ:

While quantitative easing boosts the value of pension assets, it lowers investment returns and increases estimates of future liabilities. Because typical defined-benefit plans are only 70% funded and face liabilities several years longer than their assets, that leads to wider deficits…But many trustees say the best response would be for the BOE to stop buying long-dated gilts and buy bank bonds instead. Not only would this ease bank funding difficulties, and thereby improve the supply of business loans, it would allow gilt yields to rise.

With interest rates at historic lows, pension funds are in a tough spot. If interest rates rise, they will suffer capital losses and actually be in a tougher spot. I’d say this is good reason to avoid bonds that are attached to entities with large, unfunded pensions (eg, states, munis).

When the government tries to improve prices, it creates winners and losers.

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