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Bank of England ‘wrong’ to suggest QE has not hurt pensions

The Momentum UK Team 24 August 2012

Recent claims from the Bank of England that quantitative easing (QE) has increased spending in the economy have been criticised by the pension provider Saga today.

The Bank of England’s analysis of quantitative easing offered the conclusion that people would have been ‘worse off’ without their decision to pump £375bn of printed money into the economy.

QE is a process by which new money is printed in an attempt to kick-start growth. This new money is normally introduced into circulation by mass purchase of government bonds (gilts). This drives down the yield on gilts which could in turn increase the deficit seen in final salary pensions and lower annuity rates offered by insurance companies which are often invested in such bonds.

Dr Ros Altmann, Director-General of Saga argued that the report failed to address 21 million over 50s who have retired or will be retiring soon whose annuity rates have fallen due to the effect of QE. Altman said:

“It is asserted, but not proven, that pension savers are no worse off due to QE gilt-buying, because the value of their pension savings has gone up to offset the fall in the annuity income they will receive when converting their pension fund into a pension income.”

“This assertion is simply not correct and the reality is very different for those recently or soon-to-be-retired.”

‘Damage done by inflation’ ignored

The Bank of England have admitted that QE has pushed up the rate of inflation however Altmann claimed that their report was ‘oblivious’ to the the damaging effect that this has had on pensioners’ retirement incomes.

Altmann also said that claims that those who had purchased their annuities before QE would not be affected arguing that this was ‘not true’,

“More than 90% of those buying annuities are buying level incomes with no protection against inflation at all. This means that their future income will be permanently lowered by QE pushing up current inflation and all those buying annuities after QE started will also have permanently lower future incomes as a result of both the effect on annuity rates and future inflation.”

“The damage is particularly problematic, yet the Bank keeps suggesting it is not due to QE. The reality is very different. Buying gilts and artificially driving down gilt yields which underpin both defined benefit and defined contribution pensions is causing significant economic damage, is permanently impoverishing pensioners, is pushing up inflation and damaging consumer spending.”

“All the negative impacts need to be taken more seriously.”

Momentum