Bank of England living in an academic parallel universe and denying QE impacts
Dangers of QE are real yet Bank seems in denial – QE side effects must not be ignored
Undermining UK pensions is not a recipe for economic recovery
by Dr. Ros Altmann
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Bank of England living in an academic parallel universe that ignores reality: It is astonishing that the Bank of England is trying to deny the damage done by its policy of Quantitative Easing. QE has damaged UK pensions as a whole and this is actually weakening growth. Unfortunately, Professor David Miles, writing in today’s Daily Mail, seems determined to assume away the impact. His article is full of inaccuracies, and the concern must be that the Bank of England is somehow living in an academic parallel universe to the one inhabited by the rest of us.
QE gilt-buying has damaged UK pension funds and growth: QE has been a disaster for anyone recently or soon-to-be retired, except those who have final salary-type pensions. It has also been a disaster for employers running such pension schemes because, instead of the individuals themselves, the employers are picking up the extra costs of pensions that have resulted from QE gilt-buying. Bank of England gilt purchases have driven down yields, and each 1% point fall in gilt yields adds around 20% to pension liabilities. Since 2008, gilt yields have fallen by 2.5% point, which means liabilities have risen by 50% – and assets have certainly not risen by anything like that amount. Therefore, QE has caused final salary scheme deficits to rise sharply, forcing firms to invest in their pension funds, not their business, which weakens growth – and indeed some companies have been forced into insolvency due to their pension deficits. These impacts have already damaged growth.
Falling annuity rates have permanently impoverished over a million pensioners: Driving down gilt yields also directly reduces annuity rates. Anyone who bought an annuity in recent years at the artificially depressed rates that have been created by QE will be permanently poorer for the rest of their life – buying an annuity is a one-off irreversible decision. Nearly half a million people every year are buying an annuity so already QE has damaged over a million pensioners for the rest of their lives.
In the real world, annuity rates are down 20% and asset prices have not risen: David Miles says falling annuity rates have been offset by rising asset prices, but in the real world of pensions this analysis does not stand up to scrutiny. He cites as evidence that annuity rates have fallen by 1.5 percentage points since their peak in 2008, while equities have risen by 50% since the low in March 2009. These figures are not relevant to the actual value of people’s pensions and do not excuse the damage done by QE. Taking different series of dates over the past few years, the picture of real life is very different from that apparently perceived by the Bank of England.
Selective choice of starting dates is irrelevant for long-term pension funds: For example, since June 2008, the 1.5 percentage point fall in annuity rates equates to a 22% fall in the amount of pension someone receives, while in that same period the FTSE index has also fallen by 3%.
From March 2008 to March 2012, annuity rates fell 18% and the FTSE was unchanged.
From September 2008 (when Northern Rock failed) to March 2012, annuity rates have dropped by 22% and the stock market rose by only 4%.
Is Bank’s academic approach blinding it to the real world? So the analysis claimed by David Miles seems fundamentally flawed. It’s all very well to make a theoretical argument and choose convenient starting points, but the reality of life for pensioners is simply not like this. First of all, just selecting the March 2009 low as a basis for starting the equity market comparison is disingenuous. This would only be valid if pension funds had bought new equity holdings at the low, after having cashed in their old holdings beforehand! The reality is that most people’s pension funds are invested in balanced funds, with profit funds or unit trust managed funds, none of which have risen by 20%, never mind 50%. Does the Bank of England not know the truth, or is its academic approach blinding it to the real world impacts?
Bank also ignoring inflation dangers: Even worse, retirees buy only level annuities so they have no inflation protection! Yet, in the real world, QE has created inflation (which the Bank keeps telling us is about to fall sharply below 2% but which, in reality, has remained way above target). With inflation staying stubbornly above the BofE’s target, one has to question the credibility of their analysis.
Bank of England failing to focus on the real evidence, assuming it away: They seem to be denying evidence that is plain for others to see – they tell us inflation will be falling to 2% and have consistently been wrong. They tell us QE has not damaged pension funds because of an offsetting rise in asset markets – they have been wrong on this too. They tell us that QE has not damaged annuity rates or personal pensions because the equity market has risen – again they are just wrong. What is going on?
Gilt-sellers do not switch into UK assets, so QE may not benefit UK growth at all: David Miles claims that buying gilts boosts the economy and increases asset prices, but in the world of financial reality, sellers of gilts are not switching their money to other assets in the UK. They may be buying overseas bonds, overseas equities, commodities or buying financial derivatives. None of this will directly stimulate the UK economy, but it does help bank trading profits. QE also relies on banks to transmit the newly created money to other parts of the economy that could create growth, but this is just not happening – and clearly cannot be relied on.
Bank may need to accept that QE has failed or has no more mileage: In fact, via its impact on pensions and pension funds, QE is actually damaging growth. Especially from current low levels of gilt yields, printing further money to buy gilts is unlikely to stimulate growth and could indeed make growth worse, not better. The Bank may have to accept that its policy experiment has failed, or certainly has no more mileage. Buying gilts does not directly stimulate the economy.
Bank should not buy more gilts – maybe help underpin other investments to create jobs: Buying more gilts is not going to boost growth. Money is needed for small business lending and infrastructure investing that would directly create jobs. Distorting the gilt market is dangerous, it undermines our pension system and has side-effects that actually damage growth – both short-term and long-term. This policy may seem to work in academic models, but in the real world, with our ageing population and pension system that is underpinned by gilt yields, the medicine may be doing more harm than good. The sooner the Bank faces up to this reality, the better.
Notes for Editors:
Here is a selection of alternative figures – any of these show a very different picture from that which the Bank of England claims:
|June 2008||March 2012||% change|
|Annuity rate||6.76%||5.27%||22% fall|
|15 year gilt yield||5.17%||2.75%||2.42 pp fall|
|March 2008||March 2012||% change|
|Annuity rate||6.43%||5.27%||18% fall|
|15 year gilt yield||4.51%||2.75%||1.76 pp fall|
|Sep 2008||March 2012||% change|
|Annuity rate||6.74%||5.27%||22% fall|
|15 year gilt yield||4.67%||2.75%||1.92 pp fall|