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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It appears disingenuous in the extreme for the bank to deny that QE and its impact on gilt yields is not having an overall adverse effect on annuity rates and pension funding more widely.
Although there are other factors, notably improving longevity, that have contributed to the problem, most experts would agree that QE has been bad news in that respect.
Indeed, if the bank were to persist with is policy and annuity rates were to fall much lower, we will reach the point, which I fear we are close to now, where annuities simply repay the original capital to those who live to their normal life expectancy – and are, of course, offering substantially less value to those who might not.
This is adding to the problem we are all struggling with at the present time of trying to persuade people that they must plan for their old age and that pensions are a cost-efficient way of doing so.
Perhaps it is time for the bank to take a reality check in relation to QE and its impact on pensions.
It is easy to cast the Bank of England as the enemy of pensioners and savers, but the picture is not black and white. Annuity rates were falling already and, without the asset purchase programme, the picture might have looked a whole lot worse.
This doesn’t mean that the BoE asset purchase programme has had no impact on annuities, as the very low current level of gilts is undoubtedly attributable in part to QE. However, it should be seen in the context of the wider economic conditions and the specific trends in the annuity market. These annuity market trends include improving life expectancy, increased underwriting and more stringent solvency requirements.
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