Bank of England defends QE but admits rich benefit most

Bank of England The Bank of England makes no bones about the fact that the QE policy is unprecedented

The Bank of England has defended its policy of quantitative easing, despite admitting that the top 5% of households have benefited the most.

Since March 2009, the Bank has tried to stave off recession by buying £375bn of government bonds, known as gilts.

The aim has been to cut their returns, forcing investors to put their money elsewhere, such as in shares.

Although pension funds have suffered as a result, the Bank says most people are better off because of QE.

"By pushing up a range of asset prices, asset purchases have boosted the value of households' financial wealth held outside pension funds, although holdings are heavily skewed, with the top 5% of households holding 40% of these assets," the Bank said.

"QE has caused the price of gilts to rise and yields to fall, in turn leading to an increase in demand for, and price of, a wide range of other assets, including corporate bonds and equities," the Bank added.

"That has lowered borrowing costs for companies and households and increased the net wealth of asset holders, both of which have acted to stimulate spending.

"Most people in the United Kingdom would have been worse off without this response, including savers and pensioners," the Bank added.

Bank 'not correct'

The Bank, in its 22-page report on QE, admits that savers have been hit by reduced interest rates on their savings.

Analysis

This is the Bank of England's first major analysis of how policies adopted since late 2008 - low interest rates and quantitative easing - have affected households.

Some might ask, why has it taken so long? The Bank's work is in response to a request by the Treasury Select Committee.

It amounts to a robust defence of its policies, though some pension experts are already begging to differ.

The Bank is clearly sensitive to charges that it has harmed savers, hence its argument that while depositors have lost out, borrowers have gained more and many households will be in both camps.

Debt-free savers may well see things differently.

It pointed out that this was mainly due to its policy of cutting its bank rate to a historical low point of 0.5%, rather than to QE.

The Bank's analysis of QE was immediately disputed by Saga, the financial services group that targets the over-50s.

Its director general, Ros Altmann, said the Bank was simply wrong.

"The Bank fails to properly address the impact of QE on... the 21 million over-50s who have been negatively impacted," she said.

"It is asserted, but not proven, that pension savers are no worse off due to QE gilt-buying, because the value of their pension savings has gone up to offset the fall in the annuity income they will receive when converting their pension fund into a pension income.

"This assertion is simply not correct and the reality is very different for those recently or soon-to-be-retired," she said.

'Declining annuities'

The policy of QE has also been blamed by some critics for the continuing decline of annuity rates in the past few years.

These are a measure of the annual income that someone can buy with their private pension fund at retirement.

As the income is provided by insurers, who invest the accumulated private pensions funds in government bonds, so the decline in gilt yields has helped to force down the income available when buying an annuity.

The Bank admitted this was partly true, but was not the whole story.

"For those approaching retirement in defined contribution schemes, lower gilt yields as a result of QE have reduced annuity rates," the Bank said.

"But it is crucial to allow for the fact that QE has raised the value of pension fund assets too.

"Once allowance is made for that, QE is estimated to have had a broadly neutral impact on the value of the annuity income that can be purchased from a typical personal pension pot invested in a mixture of bonds and equities," the Bank added.

This view was supported by Tom McPhail, a pensions expert at financial services group Hargreaves Lansdown.

"It is easy to cast the Bank of England as the enemy of pensioners and savers, but the picture is not black and white.

"The very low current level of gilts is undoubtedly attributable in part to QE. However, it should be seen in the context of the wider economic conditions and the specific trends in the annuity market.

"These annuity market trends include improving life expectancy, increased underwriting and more stringent solvency requirements," he pointed out.

'Broadly neutral impact'

The National Association of Pension Funds has previously claimed that the ballooning of pension scheme deficits in the past year has been largely due to QE.

The cut in gilt yields has reduced the income that pension schemes can obtain from these assets to pay people's pensions now and in the future.

But the Bank of England partly disputed this analysis.

"The paper shows that QE also has a broadly neutral impact on a fully funded defined benefit scheme," it said.

"But schemes that were already in substantial deficit before the financial crisis are likely to have seen those deficits increased."

The policy of QE means that the Bank now holds more than a third of all government bonds in issue.

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