Bank of England deputy says QE could benefit pension savers

The Momentum UK Team 23 February 2012

The deputy governer of the Bank of England has defended the Bank's Quantitaive Easing (QE) strategy after widespread criticism from the pension industry.

In a speech given on Tuesday Charles Bean said that while QE may have damaged pension incomes, those still saving into a pension fund could actually benefit from the Bank's policy.

QE involves pumping new money into the economy in the hope of kick-starting growth. The government this month announced that it would be printing another £50billion bringing the total amount of QE to £325billion.

Much of the new money is introduced into circulation through the purchase of government bonds or gilts, driving yields down. Depressed yields can have a negative effect on the annuity rate or income that retirees can expect to purchase with their pension pots.

However, deputy governor Charles Bean defended QE measures saying that the policy could be a positive thing for those who are still saving into a pension. Bean admits that annuity rates have fallen, but goes on to explain:

"...that is only part of the story. Those pension funds will typically have been invested in a mix of bonds and equities, with perhaps a bit of cash too. The rise in asset prices as a result of quantitative easing consequently also raises the value of the pension pot, providing an offset to the fall in annuity rates.

The impact of quantitative easing on those approaching retirement is thus more complex than it seems at first blush."

Joanne Segars, the chief executive of the National Association of Pension Funds, commenting on the Bank's latest QE measures announced earlier this month, said:

"Retirees who get locked into a weak annuity will find that the Bank's money printing leaves them out of pocket for the rest of their lives.

QE could also have a negative effect on many final salary pension schemes. Segars explained:

"If there is a depression in interest rates, low returns on investment will increase the deficit in many final salary pension schemes. It could mean extra expense for employers forced to bridge the gap, and it might make it more expensive to provide the scheme in the first place. Increased financial pressure may be especially hard to deal with in throes of an economic crisis."