- The government's business champion for older workers is calling for debate on impact of current exceptionally low bond yields.

Ros Altmann says 2014 was a tough year for pension investors, with pension deficits rising sharply, while annuity rates fell.

She says that the stronger economy and sharply falling unemployment would normally have heralded rising interest rates and equity prices.

Instead, interest rates remained low and gilts became increasingly expensive as long yields fell to record lows towards the end of the year. This partly reflected falling oil and commodity prices and subdued inflation, but was also the result of pension fund gilt purchases competing with Bank of England buying as gilts shrugged off the fiscal deficit. Meanwhile, shares fell in 2014.

She continues: "Defined benefit scheme deficits ballooned by nearly £200billion, as low bond yields inflated the present value of pension liabilities and asset prices did not keep up. The Pension Protection Fund reported that pension fund assets increased 9.8%, but liabilities rose by a massive 26.4%, so UK pension deficits rose to £221bn at end November 2014 (from £28.5bn deficit the previous year).

"Many companies have poured billions of pounds into their pension funds, in an effort to fix the shortfalls, only to find deficits increasing further. The fall in gilt yields was so dramatic that many companies are finding it almost impossible to manage their pension situation. This could be damaging to economic performance, even though quantitative easing aims to boost growth."

Altmann adds: "Rising pension deficits are a threat to many companies, so the Pension Regulator's new objective to consider scheme sponsors' long-term survival is a welcome acknowledgement that deficits may be distorted by QE.

"The impact of QE on investment risk is uncertain but the impact of low bond yields on annuity rates is usually permanent for those buying lifetime annuities now. A proper debate about these dangers is long overdue. The jury is still out on how damaging the pension ramifications of QE may be. Will any short-term gains be offset by longer-term pain? The easiest part was introducing QE, but the real policy challenges come when it is unwound and the resulting investment fallout is felt."

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