Pensions slashed as a result of Bank of England's 'loose monetary policy'

The Momentum UK Team 18 April 2012

Lower interest rates as a result of quantitative easing have 'badly affected' pensioners' annuities, according to a committee of MPs. The committee urged the Bank of England to offer 'estimates of loss' to affected groups and take appropriate measures to help them.

Since 2009, the Bank of England has printed £325 billion in order to purchase government bonds. The mass purchase of bonds can cause yields to fall which can have a negative impact on annuity rates

This act known as 'quantitative easing' occurs when interest can be pushed no lower so a central bank pumps money into the economy in order to increase spending and facilitate growth.

The UK's current interest rates recorded sit 0.5% - the Bank of England's lowest to date. A recent report by the Treasury Committee states that these low rates reflect 'loose monetary policy' of which pensioners and savers will be 'penalised' for.

The report on the budget stated:

"Loose monetary policy, achieved through quantitative easing and low interest rates, has redistributional effects, particularly penalising savers, those with 'drawdown pensions' and those retiring now,"

It went on:

"The policy of extremely lax monetary policy has not been without criticism. Under this policy, savers receive a far lower return on their savings than under more normal conditions. Meanwhile the returns that new pensioners will receive on their annuities have also been badly affected."

The committee's report used statements made by the National Association for Pensions Fund (2012) in order to reiterate their concerns about quantitative easing:

"People who are retiring now are finding that annuity rates have been squashed by QE, and that they will get a smaller pension than they expected. 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."

The Bank of England responded to these suggestions by claiming that Treasure Committee's argument was one-sided by only focussing on the fall of annuity values:

"While annuity rates might have been driven down by our asset purchases, at the same time the value of holdings in pension funds, in gilts, equities and corporate bonds, will have been driven up."

The committee's report concluded that:

"While the aggregate of savers and pensioners may have received some benefit from higher asset prices, there will be many individuals who will not have benefited."

They suggested that the parties who will be most affected by the monetary policy issues should be offered estimations of their losses by the Bank of England.

"The Bank of England, after, where appropriate, consultation with the Treasury, should provide its estimate of the overall benefit and loss to pensioners and savers from quantitative easing. It should, in addition, estimate how that balance changes depending on when an annuity was purchased...We We further recommend that the Bank of England, and particularly MPC members, improve upon their efforts to explain the benefits of the current position of monetary policy to those affected by the redistributive effects of quantitative easing. We recommend that the Government consider whether there are any measures that should be taken to mitigate the redistributional effects of quantitative easing, and if appropriate consult on them at the time of the Autumn Statement."

The report also aired its doubts in other areas of the Budget. The decision to cut the top tax rate from 50% to 45% was another area that faced scrutinisation by the Treasury Committee. They questioned the costs and the benefits of this declaration, claiming that both were 'highly uncertain' and could be 'significantly more or less' than the £260m stated in the Budget.