Warning that ECB bond-buying programme will hit pensions

The European Central Bank's decision to rollout a bond-buying plan will lead to increases in pension scheme liabilities, consulting group Mercer has warned.

It said the impact of quantitative easing (QE), including falls in bond yields and the weakening of the euro, will cause further challenges for plan sponsors and trustees.

The group warned that funding proposals, which are already under pressure, may go off-track and need to be re-cast. Mercer called on sponsors and trustees to consider whether their existing investment strategy is adequate, adding that alternative asset classes may now be more attractive given the increase in the cost of buying bonds.

It said hedging strategies, including currency hedging, should be reviewed.

Mercer's latest Pensions Risk Survey data, published on Friday, shows that the accounting deficits of defined benefit pension schemes for leading semi-states and the companies listed on the Irish Stock Exchange had already increased to an estimated €10 billion by the end of 2014, a 40 per cent increase over the year.

While defined benefit (DB) pension schemes will be most impacted by QE, Mercer warned that defined contribution (DC) schemes will also come under pressure, with members who are approaching retirement possibly finding that the cost of buying an annuity is more expensive than anticipated.

“The QE programme announced on Thursday has added further uncertainty and complexity to pension schemes. This highlights the importance of a strong risk management ethos in DB schemes, with an ability to react quickly to changes in market conditions. From a DC perspective, trustees should urgently review the funds available to members and ensure that they remain appropriate in this changed environment.”