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October Retirement Strategy | By Gregor Watt

The recent comments by deputy governor of the Bank of England Charlie Bean that low interest rates are a deliberate attempt by the central bank to get savers to erode their capital rather than an unfortunate side effect of the stimulus package have enraged many pensioners and pension campaigners.

In an interview with Channel 4, Bean said: “I wouldn’t want to call it a side effect. I think it’s important to realise that actually it’s a key way that monetary policy affects the economy by affecting the incentive to save.

“What we are trying to do by our policy is encourage more spending. Ideally, we would like to see that in the form of more business spending but part of the mechanism that might encourage that is having more household spending so in the short term we want to see households not saving more but spending more.

“I think it needs to be said that savers should not necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit.”

Although it makes sense, at least in economic theory, to try and get more money into the economy, from all sources not just from the central bank, the sentiment he expressed has been strongly critised, not just by savers who resent having to eat away at preciously guarded savings but also by pensions experts who say this sentiment sends out entirely the wrong long-term message to potential savers - that it does not pay to be prudent with your money. Dr Ros Altmann says : “We must not destroy savings incentives, or punish savers for being prudent. Of course, businesses need to spend but households should be encouraged to pay back debt and build up reserves to sustain them in older age, not to keep spending like there is no tomorrow. Otherwise, millions of people face very miserable tomorrows.”

Bean: ’It needs to be said that savers shouldnot necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit’

Barnett Waddingham partner and former chief executive of The Pensions Advisory Service Malcolm McLean also says the deputy governor’s statement will have a damaging effect on people’s perceptions of long-term saving.

McLean says there is already a real risk that people are not saving enough and this is not the message that the public needs to hear.

“It doesn’t help when the Deputy Governor of the Bank of England is quoted as saying he would prefer people at the present time to spend not save. In the context of our looming pension crisis, that is hardly the message the pensions community and those it serves really wants to be put out, is it?”

The latest statistics from the Office of National Statistics suggest that Bean and the Bank of England may be getting their way. The third quarter of 2009 saw the household savings ratio hit 7.7 per cent, its highest level since 1999, but since then it has been steadily declining, to 6.1 per cent in the last quarter of the year and 5.3 per cent and then 3.2 per cent in the first two quarters of 2010. The average savings ratio since the 2000 is 4.2 per cent.

However, Altmann warns that if the Bank’s policy is successful in stimulating the economy, the increase in inflation will have another negative effect on the prudent savers and add to the disincentive to save for the long-term.

Altmann says: “Penalising savers and damaging pen-sions to help borrowers and bankers is unfair. We will not get strong growth if the older generation’s pensions are decimated. If the Bank of England creates inflation to help devalue debts, then a generation of savers and those who did put aside money for future pensions will be damaged, which will cause future generations to mistrust savings.

“Not only will this lead to economic decline in the long term, it also flies in the face of fairness, it under-mines pensions, discourages saving and leads to misery for millions.”

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