Mario Draghi has defended the European Central Bank’s (ECB) activist monetary policy, insisting it has not damaged pension funds and is, in fact, likely to lead to increased contribution and savings rates.
The president of the ECB defended its policy of quantitative easing (QE) but said the institution would be wary of keeping interest rates at their current low level for too long.
In a speech in Washington DC at the IMF, Draghi said he accepted that continued low interest rates could have “undesirable consequences” for economies with ageing populations, as it could not only lead to lower consumption over the lifetime of QE but over the saver and pension fund member’s lifetime.
“For pensioners, and for those saving ahead of retirement, low interest rates may not be an inducement to bring consumption forward,” he said.
“They may on the contrary become an inducement to save more, to compensate for a slower rate of accumulation of pension assets.”
His comments contrast with warnings from industry association PensionsEurope, which recently said pension funds risked becoming “collateral damage” as QE progressed.
Peter Borgdorff, director of Dutch healthcare scheme PFZW, has said his fund also raised concerns with Klaas Knot, Dutch representative on the ECB governing council, but that the council “did not listen”.
Draghi argued that, even where QE was seeing savings eroded, it would not be in the “genuine interest” of savers if the ECB decided to give up on its mandate of a 2% inflation target.
“On the contrary, the interest of long-term savers is that output be raised to potential without undue delay,” he said.
“This is because their financial assets are always, in the final analysis, a claim on the wealth generated by the productive part of the economy.”
He argued that it was in pension funds’ interest to see continued growth, as it increases the likelihood benefits can be paid in full.
“At the same time, the more monetary policy is able to encourage investment, the faster interest rates will return into more normal territory,” he said.
Draghi argued that a series of unconventional measures – the most recent of which was the launch of QE in March – had been required to stave off a period of low inflation.
“Those measures have proven so far to be potent, more so than many observers anticipated,” he said.
“But their potency is also because they have interacted with other policies that have put the economy and the financial sector in a better position to respond to our monetary impulses.”
Dragi’s insistence that QE has not harmed European pension investors stands in stark contrast to rising liabilities and deficits, with both German airline Lufthansa and Bank of Ireland’s Irish defined benefit funds seeing a significant increase since the beginning of the year.
Dutch actuaries have also warned that the low interest rates could see the cost of pensions rise by 10%.