QE benefits pensioners? Eh?

The Bank has been under attack for months from pensioner groups who say the £375bn of money printing has triggered a \”death spiral\” in pensions, by slashing income from annuity rates.

However, a study by the Bank found that the effect of QE on annuities had been \”broadly neutral\”. At the same time, though, it boosted household financial wealth in the UK by £600bn, with the bulk of the gain going to the 15m people aged 55 and over – in particular the richest 5pc, who own 40pc of households\’ financial assets.

Sounds most odd indeed. And then we get to the sleight of hand.

QE has helped boost share prices by 20pc, it said, but the recovery has not been enough to make up the 50pc falls in 2008 and 2009. The Bank conceded that monetary policy will \”unavoidably have distributional implications\”, but that the big impact has been through cutting interest rates to a record low of 0.5pc, rather than QE.

Well, maybe not sleight of hand. But the trick if you like. For it is true but still….

Yes, pensioners have been made worse off by low annuity rates and those have been caused by low interest rates (for much of an annuity now has to be, thanks to G Brown, backed up by gilts) but that has been caused by what we did over here with this hand, not the QE that we did over there with that hand.

Quite true but not quite what people have meant.

I\’ll leave it to others to work out what gilts and thus annuity rates would be without the BoE buying up most of the gilts market through QE. I guess, without having the info, that it is the low base rate which has had more of an effect than the QE.

5 thoughts on “QE benefits pensioners? Eh?”

  1. Isn’t the base rate irrelevant to the extent the central bank _isn’t_ prepared to back it up with real action? i.e. lending unlimited amounts of money slightly above it and borrowing unlimited amounts of money slightly below it?

    So the bank has effectively been using QE to enforce its interest rate policy – indeed the ECB (And the other rescue mechanisms by proxy) is doing the same thing with its bond-buying. The explicit purpose is to drive down interest rates, in the ECB case to narrow the differences in interest rates across Euro members.

    And this does eventually feed through to retail, market interest rates, this was nicely ilustrated by the big divergence between ECB rates and market rates in early 2008. The official interest rate was unenforceable to the extent banks couldn’t get their hands on money and were prepared to pay a lot more to get it.

  2. Darn, no-one has given me my £300k…. – do you think if I ask him he’ll be able to tell me where to apply for it?

  3. They’ve got a point, I think.

    Low annuity rates only matter to people who are starting to take their pension at the moment; if you started it years ago, you’re still getting whatever annuity you had then.

    And if you’re taking an annuity now, you’ve had investments in your pension fund until now, so you’ve benefited from any increase in share or bond values. So yes, swings & roundabouts.

    Also don’t most pension funds switch gradually into bonds in the last few years before you buy your annuity? In which case it shouldn’t make much difference at all; a fall in gilt rates largely being the flip side of an increase in bond prices?

  4. Is he trying to suggest that cutting interest rates to 0.5% (actually well negative in real terms) is a GOOD thing for pensioners?

    You know, those people who tend to have savings but no debts?

    Is that what he means?

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