Pensioners hit by quantitative easing should be compensated, report says
UK - A parliamentary committee has urged the UK government to compensate defined contribution (DC) pensioners it claims have been disproportionately affected by low bond yields as a result of loose monetary policy.
In a report published today, the Treasury select committee - one of several committees set up to scrutinise government decisions - claimed quantitative easing (QE) and low interest rates had "redistributional effects" that penalised drawdown pension-holders and those facing imminent retirement.
Clive Fortes, partner at Hymans Robertson, said members of DC pension schemes "had to do something" and were effectively forced buyers of low-yield gilts.
"Defined benefit schemes have the luxury of time," he said. "They'll be looking to government bonds to de-risk in future, but they're not doing it now."
With many pension funds running a trigger mechanism, the weight of money when bond markets show signs of improving would continue to keep prices down for some time, said Fortes.
David Miles, an external member of the central bank's monetary policy committee (MPC) provoked controversy last month when he said QE had benefited pension schemes with its contribution to rising equity markets.
Some economists, including Tim Leunig at the London School of Economics, agreed.
However, the report published today distinguished between "the aggregate of savers and pensioners", who would likely to have benefitted, and "individuals who will not have benefited".
It urged the Bank of England to provide an estimate of the overall benefit and loss to pensioners from QE, based on whether the annuity had been purchased immediately before the crisis five years ago, immediately after the introduction of QE, or now.
In what could have been a sideswipe at Miles - as well as at comments made by Bank of England governor Mervyn King to the committee that QE "might not have had quite such as big an effect as some people think" - the report recommended that "the Bank of England, and particularly MPC members, improve upon their efforts to explain the benefits of the current position of monetary policy to those affected by the redistributive effects of quantitative easing".
The National Association of Pension Funds (NAPF) welcomed the report, with chief executive Joanne Segars saying: "We support this call to see some strong analysis of the damage that QE is doing to pensioner incomes and pension funds.
"People are already worried about how to save for their old age, and the lack of clarity around QE's harmful side effects does not help."
The NAPF repeated its call for the Bank of England and the Pensions Regulator to issue a statement explaining the "distorting effects" of QE on pension fund deficits.
In March, the association estimated that falling gilt yields had pushed final salary pension funds £90bn (€110bn) deeper into the red since the second wave of QE.