QE a 'monumental mistake', pensions experts say

The Bank of England's policy of pumping money into the economy has been a "monumental mistake", pensions experts have warned .

A committee of MPs heard that measures taken by the Bank to drive the economy had backfired by squeezing individuals' incomes – both pensioners and those in work – and forcing companies to divert cash into pension funds rather than investing.

Ros Altmann, pensions expert and director general of Saga, said current policies devalued pensioners' incomes, making them less willing to spend: "Quantitative easing and ultra-low interest rates have hampered the spending power of those in the economy who were not over-indebted and who would otherwise have spent money."

By pumping money into the system, QE also drives up prices, which hits consumer demand. Simon Rose of the campaign group Save our Savers, said: "QE is an inflationary policy, as [the bank admits]. With inflation running higher than the increase in wages, it's not just pensioners, everybody is feeling the pinch."

Altmann said ending the QE programme was much more likely to herald a period of growth than its introduction had done. "History will judge this as a monumental mistake," she said. "If we do not have any more quantitative easing, the economy will be freer to grow than if we do."

Technical explanation has been hidden to ease reading:

Spoiler:

Under the QE programme, the Bank of England has bought £375bn of UK government bonds, or gilts, with newly created electronic money. It now owns almost a third of all gilts in the market. This huge influx of demand has driven gilt prices higher and means yields, or the effective interest rates on them – which represent government borrowing costs – are at record low levels.

That has the unintended consequence of pummelling pension funds, which use gilt yields to calculate their future liabilities. When gilt yields plummet, pension fund deficits effectively balloon. The National Association of Pension Funds (NAPF) estimated last year that QE had increased pension deficits by at least £90bn over the past three years.

Current regulations mean companies must plug those holes. Mark Hyde Harrison, the chairman of NAPF, said businesses are now having to contribute to their pension schemes instead of investing for the future, which negates any positive impact of QE.

He and other representatives of the pension fund industry urged the government to ease these funding demands to offset the effects of QE. Hyde Harrison said: "The argument we have is not particularly with QE. It's more about the way that, once that £90bn deficit has been created, the regulations require companies to fill it. We don't believe we're flexible enough to cope with the environment we are now in."

He said the government could direct the pensions regulator to be more flexible over how quickly it requires companies to plug their pension fund deficits. Strengthening the Pension Protection Fund, which pays the pensions of those whose retirement schemes have failed, could also be considered, he said.

QE has also reduced the incomes of recent retirees using their pension pot to buy an annuity, which sets the size of their income for life, as annuities are also linked to gilt yields.

Altmann said monetary easing had acted like a "tax increase" on older people. She said the economy is in "unprecedented territory" and the gilt market had never been distorted in such a way.

The Bank of England had not properly considered whether carrying out a policy which penalises certain sections of society is acceptable, because it has assumed that the path it has taken was the only option.

QE is not creating growth and is hampering the spending of people who are not particularly burdened with debt because they are "worried about what's coming next," she said.

QE doesn't work! - WOW! Rocket science it ain't!

I heard one backbench Tory claim that the sole purpose of QE was to prop up the current price of homes and so create a 'feelgood factor'.

What happens when that £375b of 'electronic money' works its was into circulation, as many analysts believe it eventually will?