Charlie Bean, the deputy governor of the Bank of England this week denied that Quantitative easing had reduced the value of pension funds. He also argued that the process of printing money to inflate the economy had resulted in boosting share prices, thus meaning that for a fund that was not in deficit before the recession, the impact of QE would be neutral. Mr Bean also thought that long term gilts would rise, although he would not be drawn as to when this would occur. Since the first round of QE annuity rates have tumbled by 20%, leaving many campaigners pointing the finger at the Bank for worsening retirement income levels. Ros Altmann, Director General at SAGA and campaigner for the over 50′s was scathing in her assessment of the impact of QE on annuities. She said that [the Bank] was…”..living in an academic parallel universe that ignores reality.” She added that lower annuity rates had meant that millions of pensioners had been impoverished, and rejected the claim that a rise in asset-prices had help to negate the impact of QE. David Miles who is the sole member of the MPC officially in favour of more QE stated that asset prices had risen by 19% since the Spring of 2009 which would offset the fall in gilt yields.
The bad news for those coming up to retirement is that Mr Bean signalled that more money would have to be injected into the economy if performance does not improve. Growth has flat lined for the past six months, putting more pressure on the bank to embark on another round of QE. Although this can be beneficial for the wider economy (although this is a source of contention) it does have the consequence of pushing up the price of government bonds as the Bank of England purchases them from commercial organisations and financial institutions. Despite Mr Miles being the only member on record to have been in favour of another round of QE in March, experts believe that it will not take much to convince the other members that more QE is needed to prop up the sluggish UK economy. Despite inflation falling last month retail sales have fallen by the highest margin in two years, adding to the already gloomy outlook.
Those retiring later this year who were planning on buying an annuity should be further perturbed by the signals coming out of the Bank over more QE. If rates fall much further there will be even more interest in annuity alternatives such as drawdown or fixed term annuities.