Advisers have reacted angrily to a report from the Bank of England claiming that its policy of quantitative easing has not had an adverse effect on pensions.
In a paper called The Distributional Effects of Asset Purchases, the Bank of England has argued that its policy is likely to have had a broadly neutral impact on the value of the annuity income that could be purchased with a personal pension pot. The report was written in response to a Treasury Select Committee request for an explanation about its money-printing policy, which aims to boost the economy, but which has been condemned for provoking “a death spiral” in pensions.
It argues that while downward pressure on gilt yields caused by QE has reduced annuity rates, this has been counterbalanced by a rise in the price of both bonds and equities held in pension pots. It even argues that if the pension pot contains equities, then income flows could even be higher as a result of increased dividend payments from the boost to the wider economy from QE.
But advisers and pensioner groups have attacked the report, arguing that the combination of low annuity rates and higher inflation, particularly for pensioners, has left retirees significantly worse off.
Ros Altmann, director general of Saga says: “A brief examination of the facts does not support the argument that QE has pushed up asset prices by at least as much as it has depressed annuity rates. The following tables show that investments in equity markets have been hugely volatile and the overall performance of the stock market has not risen sharply in recent years, whereas gilt yields have moved sharply lower and annuity rates have plummeted.
“The fall in annuity rates since mid-2008 is over 24 per cent. Cumulative inflation for older age groups has risen by over 20 per cent. The FTSE is relatively unchanged and the average balanced pension fund has performed poorly, so that for people with defined contribution pensions, the impact of QE in reality has not been as the Bank of England is assuming.”
Malcolm McLean, consultant, Barnett Waddingham, says: “It appears disingenuous in the extreme for the Bank to deny that QE and its impact on gilt yields is not having an overall adverse effect on annuity rates and pension funding more widely. Although there are other factors, notably improving longevity that have contributed to the problem, most experts would agree that QE has been bad news in that respect. Indeed, if the Bank were to persist with is policy and annuity rates were to fall much lower we will reach the point, which I fear we are close to now, where annuities simply repay the original capital to those who live to their normal life expectancy – and are, of course, offering substantially less value to those who might not.
“This is adding to the problem we are all struggling with at the present time of trying to persuade people that they must plan for their old age and that pensions are a cost-efficient way of doing so. Perhaps it is time for the Bank to take a reality check in relation to QE and its impact on pensions.”
Nigel Green, chief executive of the deVere Group, says: “The Bank’s findings are in sharp contrast to the reality of the situation for many of the 20 million plus people who are on the cusp of retirement or who are already retired in this country.
“There can be no doubt that QE has made millions of pensioners permanently poorer. Those who are nearing retirement have found that their future retirement income has been adversely affected by QE as the value of annuities purchased is based on the return from gilts. The demand for these gilts soars as the Bank of England buys them in the easing process, which pushes the price up but reduces the yield.
“In addition, QE can be disastrous for pension funds as it can fuel inflation, meaning more bad news for retirees who’ve already seen their funds slashed in real terms due to high living costs and low interest rates.
“Hitting the real income and spending power of a Britain’s over 50’s is not the answer to the country’s economic woes. I am baffled by the Bank of England’s report.”
A spokesman for the Bank says: “Without the Bank’s asset purchases, most people in the United Kingdom would have been worse off. Economic growth would have been lower. Unemployment would have been higher. Many more companies would have gone out of business. This would have had a significant detrimental impact on savers and pensioners along with every other group in our society. All assessments of the effect of asset purchases must be seen in that light.”