As the Bank of England decides whether to extend its policy of Quantitative Easing with a further £50bn purchase of gilts with newly created money, Saga warns that this will be yet another devastating blow for pensioners, causing further damage to annuities and pension funds. This will harm – not boost- UK growth.
Dr. Ros Altmann, Director-General of Saga, said “The Bank of England has consistently ignored the dreadful damage that its QE policy has inflicted on anyone coming up to retirement. During 2012, record numbers of people will reach age 65 and many will need to buy an annuity. Around half a million annuities are sold each year and, since 2008, annuity rates have fallen by about 25%, most of which is due to the effect of QE. That means over a million pensioners will be permanently poorer for the rest of their lives, as they have bought an annuity at rates that have been artificially depressed by the Bank of England.
The aim of QE is supposedly to stimulate the economy and fight ‘deflation’. This short-term stimulus, however, has very dangerous long-term consequences which policymakers have consistently failed to factor in to their thinking. Buying gilts is not the best way to stimulate growth – it does, of course, help the banks, but it actually has side-effects that directly damage the economic outlook. Having more and more poorer pensioners and forcing companies to put money into their pension schemes, rather than their business operations, is a drag on growth, not a boost.
Annuity rates have plunged, meaning the people’s hard-earned pension savings are not giving them the pension income they could have achieved even just a few months ago. And, if they decide not to buy the annuity but go into income drawdown instead, they will also be hit by QE because they amount of income they are allowed to take out of their pension fund is determined by the Government Actuary Department’s (GAD) rates, which are themselves based on gilt yields. The more the Bank of England buys gilts, the lower gilt yields go which in turn means GAD rates fall and pension income has to be cut. Indeed, many people in income drawdown are now facing falls in their pension income due to the drawdown rules.
Research conducted for Saga by the Cebr shows that the impact of QE has been to reduce gilt yields by over 1% and a further round of easing will depress rates yet again. The Bank already owns around half the outstanding gilt supply and demand for gilts is rising as pension funds, annuity providers and other financial companies struggle to shore up their solvency ratios. The more gilts the Bank of England buys, the harder it becomes for people to buy good value pensions, and company pension deficits have already ballooned to £85bn, placing ever more strain on corporate sponsors.
There have to be more intelligent ways of using newly created money that would more directly stimulate the economy, rather than resulting in millions of poorer pensioners for years to come and company pension schemes draining much-needed resources from their sponsors. Indeed it would be better to just drop pound notes from helicopters and let people spend them, than buying gilts and seeing the money disappear into bank balance sheets while worsening pensioner prospects.
There are several vital elements that the Bank of England needs to consider before it rolls out another damaging round of QE
So what are the problems caused by QE that are making the situation for pensioners so impossible:
- Lower annuity rates that mean lower lifetime income for anyone buying an annuity
- Lower GAD rates which mean cuts in the income that can be withdrawn from a pension drawdown policy, so even if you don’t buy an annuity you are hit by QE
- Record numbers of people are reaching their 65th birthday in 2012 and many of their pension policies require them to take their pension at age 65. If they choose not to do so, they are hit with a penalty
- If they buy a lifetime annuity without inflation protection, their income in future could be damaged by the inflation created by QE
- Company pension scheme liabilities are ballooning as lower gilt yields lead to higher liabilities and some companies will be unable to plug their deficits, leaving their members at the mercy of the PPF and reduced pensions.
- If retirees want to supplement their inadequate pensions with savings income from other forms of saving, again the Bank of England has forced rates against them and savings account incomes have suffered from rock bottom rates in recent years.
We are calling on the Bank of England to think again about how it operates its policy. Buying gilts is not a sensible way to stimulate growth and leaves millions of older people facing a real Hobson’s choice. The impact of QE on pensions and pensioners will lead to lower growth, so we urge the Bank to consider different ways of using newly created money to try to boost the economy. Lending directly to small companies who are starved of credit, underwriting small company loan schemes or investing in infrastructure bonds would all be better than buying gilts.