Pensioners sacrificed for questionable experiment

21 February 2012

Just how much money can you squeeze out of a would-be pensioner? A lot it seems, according to the governor of the Bank of England (BoE),  Sir Mervyn King, and his cronies.

Falling stockmarkets, poor annuity rates and low interest rates on savings have made life a misery for those near retirement. But things are about to get worse. A couple of weeks ago, the BoE announced that another round of money – £50 billion precisely – was going to be injected into the economy in a bid to try to resuscitate it.

This is the third round of quantitative easing, or QE, bringing the total amount of money pumped in to £325 billion since the programme was first launched back in 2009.
With a name that's not only a tongue twister, but also tops the pile of boring bureaucratic words (of which there are plenty), it is not surprising that most of us haven't quite got our heads around how it works, or, indeed, realise what detrimental effects it could have.
In very simple terms, during a recession the BoE cuts interest rates in the hope it will increase consumer spending. If that doesn't help, as a last resort the bank can inject money into the economy – in other words, use quantitative easing.
While the BoE doesn't need to physically print the banknotes as QE is done electronically, the principle is pretty much the same. Once the new money has been created, the BoE spends it on buying assets such as government bonds from the private sector, including insurance companies, banks and pension funds, so they, in turn, have more cash to lend to consumers and businesses – encouraging them to resume spending.
But although the British economy is in desperate need of a boost, the jury is still out on whether QE has actually provided an economic stimulus at all. In fact, QE has never been tried in the UK before and so far it's still just a big experiment that could go either way.
But even if it proves to have helped the economy get back on track, the side effects will be detrimental to large sections of the population. Because, the truth is,  as the editor of The Spectator Fraser Nelson says in  The Telegraph, "the BoE cannot create wealth. All it can do is transfer it".

But who does it transfer it from and who does it give it to? From savers to borrowers, of course.
Quantitative easing makes prices go up, as an increase in money has an inflationary effect. For savers, this means that the true value of their savings is being eroded over time.
But while savers are in for a tough time, it is the group of would-be pensioners who will bear the brunt of QE. The majority of people retiring use their pension pots to buy an annuity that provides a lifetime income in retirement. The problem is that annuity rates are priced on UK government bonds (gilts) and when more gilts are bought, as the BoE is doing, the value of gilts rises, so their yield – the amount they pay out as a proportion of their value – falls. And when gilt yields fall, so does the income you will get from your annuity.
With a record number of people reaching age 65 this year, pension campaigner Dr Ros Altmann warns: "Anyone retiring now will receive a permanently lower pension as a result of falling annuity rates."
While I don't expect many pensioners to stand on the barricades and shout "QE ruined my retirement", perhaps they should.
In medieval times, such a situation would have resulted in a bloodbath. We might live in more clinical times today, but make no mistake, heads will be rolling as pensioners are thrown to the lions.
And if that's not enough, experts expect another round of QE before the end of the year. But by then, some of the victims of this shambles might already have been bled dry.