Quantitative easing: quick fix or long-term solution?

The idea behind QE is that the Bank of England increases the amount of money in the economy by buying up assets - chiefly government and corporate bonds - using money it has created itself.

Theoretically, this gives the sellers of these assets more money to lend, thereby oiling the wheels of the economy.

John Walker, chairman of the Federation of Small Businesses (FSB), says the initiative isn't working. "The point of QE is to get more money to businesses so they can invest and grow. But this money isn't getting through." Banks claim there is insufficient demand for loans but FSB research shows four in 10 small firms are still being refused credit.

Campaigners are also concerned pensioners are being hit in the pocket.

Fall in annuities

One consequence of QE is a huge decrease in annuity rates, as it drives up the price of gilts and reduces the yield paid to investors. Annuity providers rely on gilts so the lower a yield they get, the worse the deal they can offer consumers.

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Tom McPhail, head of pensions research at Hargreaves Lansdown, says that in July 2008, before the Bank of England started printing money, a 65-year-old man could have secured a rate of 7.9% on his annuity. That rate now stands at 5.7%.

He says: "All things being equal, we would expect a further fall in gilt yields following an announcement of additional QE and in a short space of time this would be expected to feed through into lower annuity rates - again."

However, the Trades Union Congress is adamant QE is needed to help bolster our struggling economy. General secretary Brendan Barber says: "Given government inaction, the bank is absolutely right to renew quantitative easing. But this will only stop things getting even worse, it will not kick start the economy.

"What we really need is co-ordinated action by the government and the Bank to boost demand in the short term and build a job-creating economy for the long term."

Jargon-free fund info

Investors in the majority of funds must be provided with a Key Investor Information Document (KIID) under new European regulations. The KIID is a two-page document that sets out details of a fund's objective, investment policy, risk and reward, performance and charges.

The document replaces the simplified prospectus investors were previously given and should provide clearer information on how their money is being invested and what it is costing them.

Instead of a total expense ratio (TER), managers will have to quote an ongoing charge figure. Unlike the TER, this does not include performance fees or transaction costs, which will have to be disclosed separately by the fund manager.

The Investment Management Association (IMA) has welcomed the KIID, describing it as "free of jargon and complex descriptions". Many investors are still confused as to what charges they pay and do not understand the impact they can have on their overall return.

Julie Patterson, IMA director of authorised funds and tax, says: "We welcome the use of the term 'ongoing charge' instead of TER as it better describes what the figure represents - charges that are recurring."

The IMA is consulting on how fund management companies can better illustrate the charges associated with buying funds. Its recommendations go beyond the European regulations and suggest making more information available, such as three-year average broker commission, clearer descriptions of the bid-offer spread and other charges.

Patterson adds: "One recommendation we made in our recent draft guidance on fund charges and costs is that the ongoing charge figure should be disclosed instead of the annual management charge (AMC), or where the AMC is disclosed the ongoing charge should be given equal prominence in the information pack."