Has QE harmed pensions?

Saturday, 21 April 2012 08:50

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This week, MPs hit out at the effects of quantitative easing (QE) on Britain’s pensioners and savers – yet the Bank of England previously accused pensioners of exaggerating the impact. So who is right? Is the Bank’s policy of printing extra money damaging pensions – and if so, what is the alternative?

What is quantitative easing?

Quantitative easing is a method of stimulating economic activity. Normally when the Bank wants people to spend their cash instead of saving, it cuts interest rates, but when growth is still stalling and the base rate can’t go any lower, QE is used to inject more money into the economy.

How this works is that the Bank of England creates extra money electronically which it uses to buy assets, such as government and corporate bonds, known as gilts.

In theory, the boost given to the banks and insurers selling the assets should encourage them to lend more money to consumers and businesses. At the same time, increased demand for gilts should drive down the interest rate, or yield, making it cheaper for businesses to borrow.

But while low interest rates are a boon for borrowers, they keep the return on savings lean, while annuities, which pay an income based on gilt yields, will also be affected.

The Bank of England has kept interest rates at an historic low of 0.5 per cent for more than three years and has now pumped £325 billion of new money in the economy – but is it, as the Treasury select committee suggests, just redistributing money from savers to borrowers?

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The case against QE

The Treasury committee budget report published on Wednesday claimed that “lax” monetary policy is penalising savers, people with drawdown pensions and those currently retiring.

“While the aggregate of savers and pensioners may have received some benefit from higher asset prices, there will be many individuals who will not have benefited,” the report states.

It wants the Bank of England to provide an estimate of the overall benefit and loss to pensioners and savers as a result of the QE programme.

“We recommend that the Government consider whether there are any measures that should be taken to mitigate the redistributional effects of quantitative easing, and if appropriate consult on them at the time of the Autumn Statement,” the committee said.

Even the Bank’s own monetary policy committee (MPC) now appears to be thinking twice about whether to continue with the programme. This month’s MPC minutes revealed long-term supporter Adam Posen, who has voted for QE since September 2009, notably dropped his call for a further round.

Critics of the stimulus programme maintain that the money generated is not being made available for lending to smaller businesses and instead is sloshing about in the bank accounts of large businesses, so is not realising its economic growth potential.

Saga director general, Dr Ros Altmann, has also suggested that gilt sellers are buying overseas assets, which merely serves to help overseas economies and not the UK.

She said: “QE is a massive monetary experiment that has not clearly boosted the economy as intended but instead has boosted inflation and damaged pensions, impoverishing many pensioners.

“The Bank of England’s attempt to aid the economy with QE is akin to a doctor applying medicine to cure a patient without considering any of the side effects.

“These damaging side effects are likely to have worsened the economy. Inflation has definitely dented consumer confidence and QE has worsened pension deficits, forcing firms to spend more money on their pension schemes instead of their businesses.”

More than a million pensioners have locked into lower lifetime incomes when having to buy annuities at artificially low rates, she said.

“Buying gilts with newly created money is a recipe for more disaster, it is not an economic cure, and it merely shifts the pain of over indebtedness forwards and sideways across generations without tackling the underlying problem,” Dr Altmann added.

According to the National Association of Pension Funds (NAPF), QE is slashing billions of pounds from final salary pension funds.

NAPF also warned that those in defined contribution pension schemes may also be affected, as falling annuity rates have cut the average pension value by almost a quarter compared with four years ago.

Chief executive Joanne Segars said: “Businesses running final salary pensions are being clouted by QE. Deficits that were already big now look even bigger because of its artificial distortions.

“Pension funds want a stronger economy, so they are on board with the QE project for now. But the latest bout of £125 billion of money printing has blown a £90 billion hole in their side.”

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The Bank’s defence

On the other hand, pensioners have been accused of exaggerating how much money they are losing because of QE, the Governor of the Bank of England, Sir Mervyn King suggests.

Sir Mervyn said QE was not to blame for the drop in pension values.

“It might not have had quite such as big an effect as some people think,” he told a House of Lords hearing last month.

The Bank has tried to justify its fiscal stimulus policy in various ways, claiming that it could help to drive down inflation. But official figures out this week revealed that Consumer Prices Index inflation has gone up again to 3.5 per cent, almost double the Bank’s two per cent target and deputy governor Paul Tucker has warned that the UK could have inflation of at least three per cent this year.

QE, according to the Bank, will boost the assets held by pension funds, thereby reversing any negative impact, so an annuity holder would not suffer. But this all depends on when the pensioner bought the annuity and how much was invested.

Its main line of defence, however, is that without QE, the UK would have been in dire straits which would have affected everyone.

On top of that, pensions minister Steve Webb this week refuted the Treasury committee’s claims that the money printing programme had affected annuity rates.

Speaking on the BBC’s Daily Politics show, the MP said: “Annuity rates have been falling year after year after year. There is no clear evidence that QE has made a difference to that. Annuity rates are falling partly because people are living longer.”

But this is in stark contrast to the view of MPC member David Miles, who stated last month: “It is inevitable that there are some people that have been made worse off by the direct impact of the Bank’s asset purchases on gilt yields.”

Possible solutions?

The Government needs to find more direct ways of stimulating the economy such as buying assets other than gilts and encouraging pension funds to invest in infrastructure, according to Dr Altmann.

Lending money directly to small companies rather than relying on the banks would also provide a boost, she said.

“Use any newly created money to underpin direct small company lending, bypassing the banks, would be far more effective than credit easing which still relies wholly on the banks to lend at decent rates.”

The Saga boss believes that the pensions regulator should factor in unusually low gilt yields when considering company contributions into pension schemes.

She added: “The most important point here is for the Bank of England to recognise that just forcing gilt yields lower is not a remedy for economic recovery and indeed has had side effects that are making growth slower.”

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