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Sting in the QE tail

The Treasury select committee has asked the Bank of England to provide detailed analysis of the effect of quantitative easing on pension schemes and savers amid warnings that the policy is hitting retirees hard.

Since the start of QE, the BoE has created £325bn of new money which has been used to buy gilts, hitting retirees by cutting the value of final-salary pension scheme assets, pushing up liabilities and severely reducing annuity rates.

The National Association of Pension Funds estimates that since October 2011, when the latest round of QE began, £90bn has been wiped off UK pension funds and Saga predicts more than a million pensioners have retired with permanently low incomes as a direct result.

Saga director general Ros Altmann says: “Buying gilts has undermined UK pensions. The bank seems to be in complete denial of these negative impacts but every 1 per cent fall in long-term gilt yields means a 20 per cent rise in pension fund liabilities.”

The report from the Treasury select committee says “QE has redistributional effects, particularly penalising savers, those with drawdown pensions and those retiring now”.

The committee has called for the BoE to explain the impact of QE on savings and recommends the Government to consider ways of mitigating QE’s redistributional effects.

But Pinsent Masons head of London pensions Carolyn Saunders does not think this will make any difference. She says: “It is difficult to see that much will be gained by the bank producing an estimate of the effects of QE on pensioners and savers, other than an acceptance that it does understand the impact on these groups and has chosen to implement QE nonetheless.”

Alexander Forbes Consultants & Actuaries principal consultant Alan Carey thinks asking the bank to explain the impact of QE of pensions will be too difficult.

“There are so many factors dictating the demand for gilts, such as regulation, insurance companies and institutional investors fearful of traditionally safe foreign stocks moving to safe havens such as UK gilts. Just how much impact QE has had is unquantifiable,” he says.

BoE deputy governor Charlie Bean concedes pensioners are experiencing “a substantial income loss” under QE but says they have also been beneficiaries of the policy as it has helped protect the value of the assets in which their pensions are invested.

He says: “The rise in asset prices as a result of QE also raises the value of the pension pot, providing an offset to the fall in annuity rates.”

Carey is moderately accepting of Bean’s reasoning but believes it does not always hold true. He says: “To some extent, an increase in asset prices does offset the damage. If you are in a defined-benefit scheme and you are matching your liabilities largely with gilts, then QE is neither here nor there. But the reality is that most are holding growth-type assets such as equities, so as yields fall and liabilities increase, assets have not grown.”

Saunders, on the other hand, is more sceptical of the Bank of England’s approach. She says: “If you believe the UK would be worse off without QE, as the bank does, then, of course, it is true that pensioners have benefited from the wider effects of QE. But these wider effects are not measurable in the same way and do not have the same direct impact on an individual as a reduction in pension income, so the benefits are not immediately obvious.”

Altmann has been a vociferous critic of QE for some time because of its impact on pension income and she says the announcement last week that the UK is back in recession is proof the policy does not work and should be stopped.

She says: “QE gilt buying has not worked. Relying on the argument that things would have been much worse without it is no longer sufficient justification.”

The uproar over the granny tax in the Budget was caused by pensioners losing out on a few hundred pounds of income in retirement.

But the National Association of Pension Funds estimates QE could have cut annuity rates by about 22 per cent since its introduction, reducing the average annuity by £440 a year and is causing pensioners to pay a disproportionate share of the cost of propping up the economy.

However, Carey says: “Are people who are coming up to retirement now any more deserving of income redistribution than any other group? Probably not, especially when you consider a lot of them have benefited enormously from defined-contribution schemes, low house prices and defined-benefit pensions. I find it hard to have much sympathy for them in this instance.”



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