One way of doing that is by looking at the immediate movements in asset prices around announcements of purchases. As market participants are forward-looking, one might expect the bulk of the movement associated with QE to happen when the purchases are announced rather than when they take place. And indeed that approach seems to work reasonably well for identifying the impact of QE1 on the yields on gilts, and those on close substitutes such as corporate bonds. Analysis by Bank staff2 suggests that long-term gilt yields were around one percentage point lower than they would otherwise have been; that corresponds to a rise in long-term gilt prices of around 20%. Investment-grade corporate bond yields3 fell by about the same amount, while high-yield corporate bonds fell by somewhat more. This approach is less suited to analysing the impact of QE2. The deterioration in the economic situation, speeches by MPC members, and the minutes of the September policy meeting all encouraged market participants to expect a re-commencement of the purchase programme. As a result, the effects were already largely incorporated into the general level of bond prices prior to the MPC’s actual announcement of the new programme in October, so it becomes difficult to disentangle the effect of QE. Ahead of that announcement, however, UK sovereign bond yields did fall relative to those in Germany and the United States, consistent with an effect from QE. Moreover, in February we did make an unexpected announcement of a change in the maturity structure of our purchases.
But the more a scheme is underfunded (overfunded) to begin with, the more it will find its deficit (surplus) increased. This is entirely intuitive. By reducing yields, QE increases the cost of purchasing a given future stream of income. So if a fund starts off relatively “asset poor”, the sponsors will now find it more costly to acquire the assets necessary to match its future obligations. A corollary of this is that the cost of provisioning against additional pension entitlements being accumulated by currently serving staff unambiguously rises. That does mean that the effective cost of employing labour, when their pension costs are also included, also rises.8 This is certainly an unwanted side effect of QE. But it needs to be balanced against the higher activity and business profits resulting from QE, as well as the fact that wage growth has recently been exceptionally weak, which work in the opposite direction. Given that pension funds have for the most part seen deficits widen in recent years, whether it be as a result of the crisis and recession or the result of QE, how should sponsors and trustees respond? It makes little sense to rush to close a deficit that is likely to prove temporary. But if a deficit is likely to persist, then corrective action is required, initially to prevent it continuing to expand and ultimately to close it, though that adjustment could, quite reasonably, be spread out over time. This is all recognised by the Pensions Regulator.