Smart comments:
“The UK economy is drowning. It is back into recession and has barely grown for a year and a half. Growth in export markets has also slowed. Usually the Bank of England would try to increase the amount of lending and activity in the economy indirectly, by cutting interest rates. Lower interest rates encourage people to spend not save. Unfortunately with the base rate at a record-low 0.5 per cent, where it has been since March 2009, interest rates cannot go much lower. The Bank’s only option is to create money out of thin air and pump it into the economy directly, the technical word for this is quantitative easing (QE).
“Therefore in a widely predicted move the Bank of England has announced a further £50bn QE programme to give a further boost to the struggling UK economy. When completed it will bring the total amount of the QE stimulus to £375bn. The last QE was in February of this year. QE is generally understood to reduce long-term interest rates, though there is debate by how much, and to push up inflation, which is generally bad news for pension schemes. It is likely to further drive down annuity rates attached to bond yields, reducing the annual income for someone buying a pension from their accumulated pot. Even if the economy comes out of recession anyone buying an annuity now will never get their lost income back.
“ Pension scheme deficits, calculated monthly by the Pension Protection Fund are spiraling upwards. The cost of paying pensions from defined benefit schemes is based on the assumption that all the assets are invested in bonds. As the yield on them drops so the amount of assets needed to generate a scheme’s pensions increases. Schemes have to carry out a valuation once every three years and if they are in deficit a recovery plan has to be put in place. Employers are therefore facing substantially increased bills for their pension schemes.
“Has QE worked so far? We will never know, for we will never know how bad the economy would have been had the Bank not stepped in. One argument is that asset values would have fallen dramatically without intervention damaging pension plans. The fact is the Bank has seen the economy drowning and is taking all the steps it can save it. I am sure the Bank is well aware of the collateral damage it is doing to pensions and pensioners, but feels it has no alternative but to act, a bit like the Florida lifeguard. The Bank is no doubt also aware that in acting decisively it too will not necessarily get any praise.
“If the economy comes out of recession I expect the Chancellor of the Exchequer will claim the credit rather than giving it to the Bank’s Monetary Committee. What then is the Chancellor doing in this time of crisis?
“The Chancellor has this week confirmed that he intends to legislate so any fines from April onwards payable to the Financial Service Authority (FSA), including the recent £59.5m Barclays fine, will be paid to the exchequer rather than being used to reduce future industry FSA costs.”
|
