The Bank of England has published a paper on the distributional effects of quantitative easing (QE), which says that its implications on people approaching retirement and for pension providers depend on what type of pension scheme is being used and how well it is funded.
The paper forms part of the bank’s response to a request by the Treasury Committee for the bank to explain the costs and benefits of its policy actions, in particular to groups that are perceived to have been negatively affected.
It analyses the direct impact of the cuts in bank rates and QE on savers, pensioners and pension providers.
The paper states:
- As far as the impact of QE on pensioners goes, the incomes of those already drawing a pension before QE began will have been unaffected.
- For those approaching retirement in defined contribution (DC) pension schemes, lower gilt yields as a result of QE have reduced annuity rates, but QE has raised the value of pension fund assets too.
- QE is estimated to have had a broadly neutral impact on the value of the annuity income that can be purchased from a typical personal pension pot invested in a mixture of bonds and equities.
- QE also has a broadly neutral impact on a fully-funded defined benefit (DB) pension scheme. The pension incomes of people coming up to retirement in a DB scheme, whether fully funded or not, will have been unaffected by QE.
- DB schemes that were already in substantial deficit before the financial crisis are likely to have seen those deficits increased.
The paper also notes that the main factor behind increased pension deficits and falls in annuity incomes has not been the bank’s asset purchases, but rather the fall in equity prices relative to government bond prices, which has been the case in all major economies.†
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