19th April 2012
For at least a couple of years, many pensioners have been complaining that they have bearing the brunt of the Bank of England's policy of quantitative easing.
Now they have the agreement of an influential committee of MPs as reported here in the the Guardian. What's more, the MPs of the Treasury Select Committee suggest that the Government should look at ways of mitigating the effect.
To date, pensioner and pension representatives' complaints have tended to run along these lines. First, they say QE is stoking inflation. Second QE comes with subdued interest rates which mean that interest on savings accounts remains low, penalising those relying on this income for example pensioners. It also depresses annuity rates which are based partly on gilt rates which rely on interest rates, so those who found themselves having to translate their investments into an annuity income on their retirement have also suffered. Their savings have bought them a smaller income and that annuity decision is usually a permanent one i.e. it fixes your pension for life unless you go back to work part time.
Finally better off pensioners in income drawdown, who leave their savings invested but draw an income from them, are also thought to be suffering as the amounts they are allowed to withdraw have decreased because this is also based on gilts.
The committee report on the recent Budget just about backs all these assumptions. It says: "Loose monetary policy, achieved through quantitative easing and low interest rates, has redistributional effects, particularly penalising savers, those with 'draw-down pensions', and those retiring now. The Bank of England has argued that some of those effects may be mitigated by the increase in asset prices stimulated by quantitative easing. 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."
"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."
Pension campaigners are joining in the criticism.
Anna Bowes, Director of Savingschampion.co.uk comments about the Treasury Select Committee Report "It's totally unacceptable that the distress of savers, especially pensioners, is ignored. Mervyn King is aware of the plight of savers, but has been willing to sacrifice them on the altar of economic policy. These are real people who have diligently saved and gone without over the years to ensure that they are not a drain on the State in their retirement. They deserve better. They didn't cause the problem and don't deserve to be tossed aside as a disenfranchised underclass of a debt laden society. Let's hope the Government listens to those who represent savers and takes action to ease this pain."
On This is Money Saga's director general Ros Altmann said: "There is precious little evidence that QE is actually working to boost the economy. But there is plenty of evidence that it is having a dreadful impact on pensions and pension funds. It is causing suffering to savers and pensioners who were in no way responsible for the problem of over-indebtedness and irresponsible lending and borrowing that caused the mess in the first place."
However in its evidence to the committee, the bank was not contrite. Bank of England Deputy Governor Paul Tucker said: "I want to lean against this "savers get hurt". […] If we were not, and had not been, running an easing monetary policy for the last three years or so now, this economy would have been destroyed. Savers are investors in the future. Savers would be hugely worse off had we not been supporting demand in the economy. I know, of course, that we have pulled down the discount rate and the rate of interest paid on deposit accounts is low. I understand and have great sympathy for the effect of that on savers, because many of them did nothing to bring about this dreadful crisis, but I promise you they would be even worse off had we not supported demand to the extent that we have. So the distributional effects are important, but given the gravity of this crisis-excuse me if this is an unfortunate expression-they are second order to where we could have been."
At least, the recent jump in inflation jump may mean further QE is off the agenda for now, which will bring some relief but is unlikely to convince pensioners they haven't been paying for everyone else.