Further quantitative easing could damage pension prospects

The Momentum UK Team 06 July 2012

The Bank of England is set to print more money as part of its Quantitative Easing programme, taking the total to £375bn, in a move that could have a negative impact on pension funds and annuity rates.

The bank is expected to inject around a further £50 billion into the economy, much of which it will invest in government bonds in order to encourage spending and facilitate growth.

This may come as unwelcome news to the pension industry and retirees, as QE can drive down interest rates on Government bonds (gilts), in turn driving down overall interest rates and annuity incomes.

Pension funds which are sometimes heavily invested in gilts can suffer, with falling interest rates creating or increasing pension fund deficits, making them difficult for employers to sustain, which can put them off from offering a pension scheme altogether.

Those on the verge of retirement could face the biggest problem though- in the form of annuities. While interest rates are at a low, annuity providers are likely to offer lower annuity rates to retirees looking to convert their fund into a pension income.

Dr Ros Altmann, the Director-General of Saga has commented on the effects of the bank’s decision, saying:

“We have been urging the Bank of England to hold off further QE until there had been a thorough assessment of its impact on our economy. We are deeply disappointed that it has ploughed on regardless.

"The Bank of England needs to stand back and examine whether this policy, which it has always admitted is just an ‘experiment', is working and is acting as a stimulus for growth.”

While the news has been received with mixed responses by the pension sector, The Bank of England insists that this measure is beneficial long-term to the whole economy, including pensions.