By Philip Pilkington, a writer and journalist based in Dublin, Ireland
More pension funds are getting their act together and calling the British government on their dodgy pseudo-stimulative policies. The British pension provider Saga has released an excellent counterargument to the recent round of QE announced by Bank of England governor, Mervyn King (an argument that we have been pushing for some time).
Saga are seething and you would guess that pension recipients are no less enraged because the effects that QE is having on pension funds appears to be quite devastating. Dr. Ros Altmann, Director-General of Saga, made the following statement which will resonate with many:
The Bank of England has consistently ignored the dreadful damage that its QE policy has inflicted on anyone coming up to retirement. During 2012, record numbers of people will reach age 65 and many will need to buy an annuity. Around half a million annuities are sold each year and, since 2008, annuity rates have fallen by about 25%, most of which is due to the effect of QE. That means over a million pensioners will be permanently poorer for the rest of their lives, as they have bought an annuity at rates that have been artificially depressed by the Bank of England.
What’s more annuity rates – that is, the rate at which pensioners draw down income – has dropped significantly:
Annuity rates have plunged, meaning the people’s hard-earned pension savings are not giving them the pension income they could have achieved even just a few months ago.
That means less spending power in the pockets of pensioners; and that, in turn, means less demand in the economy.
Back in 1995 British pensioners were offered a new, more risky but potentially more profitable option called an ‘income drawdown’. Helen Pow at the Daily Telegraph explains the income drawdown as follows:
Income drawdown allows people to take an income from their pension savings while leaving it invested in the stock market. It is an alternative to an annuity – which involves you handing over your pension savings to an insurance company in exchange for a guaranteed annual income for the rest of your life.
But even going down this route – which is far more risky than buying annuities – won’t allow Grandma and Gramps to avoid the ravages of QE. Saga again:
If they decide not to buy the annuity but go into income drawdown instead, they will also be hit by QE because they amount of income they are allowed to take out of their pension fund is determined by the Government Actuary Department’s (GAD) rates, which are themselves based on gilt yields.
Which makes perfect sense because, as Helen Pow explains:
Typically these [income drawdown] funds are invested in a combination of shares, cash and fixed-interest investments such as bonds and gilts.
Simply put: QE programs hurt pensioners big time – and the more QE they pump in, the more they damage pension funds. Indeed, back in October James Kirkup at The Daily Telegraph reported that the last round of QE sapped money from pensioners to the equivalent of around £3,750 a head. That’s a big chunk of change.
Saga have largely come to the same conclusion as we have on the Quantitative Easing programs being run by the UK and the US:
There have to be more intelligent ways of using newly created money that would more directly stimulate the economy, rather than resulting in millions of poorer pensioners for years to come and company pension schemes draining much-needed resources from their sponsors. Indeed it would be better to just drop pound notes from helicopters and let people spend them, than buying gilts and seeing the money disappear into bank balance sheets while worsening pensioner prospects.
John Maynard Keynes couldn’t have put it better himself. Of course, there are better ways to distribute newly issued money to people; you could employ them, for example, or you could cut taxes massively. But Saga’s main point stands. QE is dodgy policy and real stimulus is needed urgently.
Thankfully, with companies like Saga getting the word out through press releases, this phenomenon is no longer just confined to FOMC meetings. Increasingly it is coming into the public eye.
Saga are also right not to point their guns at Mervyn King and other central bankers; they’re doing the best they can given the circumstances in this regard. The real problem are the stubborn and intractable governments in the US and the UK who, despite having their own currency and hence extremely low interest rates, simply refuse to engage in real stimulus policies.
Spending policy in these countries is being run by economic vandals and so, with these thugs on her case, it’s no surprise that Grandma is too scared to take a trip down to the local shop and engage in some good old-fashioned economic-stimulating consumption.