ECB's QE triggers EUR92bn increase in European pension liabilities
The European Central Bank’s quantitative easing measures will indirectly increase European pension liabilities by €92bn, according to Standard & Poor’s.
The ratings agency says that the launch of the ECB’s stimulus next month together with the ensuing prolonged low rates environment, leaves underfunded defined-benefit (DB) pension schemes in Europe vulnerable.
A DB pension scheme - sometimes called a final salary pension scheme - is one that promises to pay out an income based on how much you earn when you retire.
While DB schemes are now in decline, the market is still worth around £1,800bn and will take a decade or more to mature, increasing worries amongst corporates over the new stimulus environment in the Eurozone.
The risk remains that QE achieves nothing more than promoting stagflation in the euro area, said Paul Watters, credit analyst at the rating agency.
"A combination of weak growth, inducing the ECB to continue with its aggressive monetary policy stance, and rising inflation would be a treacherous combination for DB pension schemes already struggling to contain their plan deficits,” added Watters.
Watters said that effective risk management remains paramount for the rating agency in order to enable companies to manage their pension risk exposure and potentially mitigate any adverse impact on their credit metrics.
Without careful risk management, Watters said that DB plan deficits will become a more material negative credit factor over the next two years.
“Our analysis shows that DB pension scheme liabilities will increase by 11% to 18% (equivalent to €58bn to €92bn) in 2014, driven by the sharp fall in long-term corporate bond yields and only partly offset by the fall in long-term inflation expectations,” added Watters.
He added that liabilities could even climb further in 2015, assuming the recent reduction in long-term corporate bond yields to below 1.5% holds through the year.