LONDON (Reuters) - Pension funds in the UK will be given no special treatment to alleviate the impact on their coffers from repeated rounds of central bank easing that have left employers struggling to plug rising deficits in workplace schemes.
The Pensions Regulator, which oversees pension schemes offered by UK employers, acknowledged that weak economic growth and quantitative easing measures have lowered returns from UK government bonds, a staple investment for pensions funds.
But it rejected calls to make allowances for the change in its first annual statement on funding conditions published on Friday.
"The regulator does not believe this is a prudent approach as it seeks to second guess future market conditions," it said in a statement.
The UK economy slid into a double dip recession this week fuelling predictions that another wave of central bank easing could be on the horizon.
The cost to Britain's pension industry of the Bank of England's 325 billion pounds of quantitative easing to date could total 270 billion pounds, as yields on gilts, used to calculate liabilities, have plummeted making it more expensive to pay for future liabilities, the National Association of Pension Funds estimates.
"While the Pensions Regulator acknowledges this side effect of QE in its first annual statement, its advice to trustees fails to deal with the problem," said Neil Carberry, Director of Employment & Skills policy at the Confederation of British Industry, which represents 240,000 businesses in the UK.
"We need to take more account of the effects of QE when making the calculation."
The scale of the shortfall will likely be crystallised when around one third of the UK's 6,500 final salary schemes report their triennial valuations this year.
Companies are required to fund any dramatic shortfalls, which can be an immediate hit on cash flow, diverting money from shareholder dividends, stock buybacks and capital investments.
The regulator, however, says that most schemes should be able to meet their pension promises with either no change or only small changes, with struggling employers, which could total around 300, given greater breathing space to plug funding holes.
UK companies would have needed to inject 470 billion pounds into pension schemes as of March 31 2011, to match their liabilities, the latest edition of the Purple Book, an annual publication of the Pension Protection Fund and the Pensions Regulator estimates.
"Whilst the Regulator is optimistic that the majority of pension schemes will not need to make significant increases in their contributions, it will need to stand ready to adjust its expectations if the real experience of pension schemes turns out to be far worse," said Joanne Segars, CEO of the NAPF.
The NAPF, which represents 1,200 pension schemes in the UK, with 15 million members and assets of around 800 billion pounds, has been calling on both the Bank of England and the Pensions Regulator to address concerns over the side effects of QE.
A government report published last week recommended a full assessment of the impact of QE on pensions and whether any measures to mitigate its effects might be appropriate.
Ros Altmann, Director-General of Saga said that the Regulator's reluctance to appear more lenient was understandable but the temporary nature of the effects of QE should have been highlighted so that companies do not feel pressured to divert resources to plug transitory deficits.
"It would be tragic if companies are forced into insolvency by these inflated deficits, when part of the problem is an attempt by policy makers to improve the economy," she said.
Editing by David Cowell