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Secondary Annuities Market – thousands will be disappointed

18 October, 2016

Thousands Of People Will Feel Let Down By Government Decision To Abandon Secondary Annuity Market

Major disappointment for thousands of people:  The Government’s decision not to proceed with its proposals to allow people to sell back their annuity income will come as a major disappointment to thousands of people.  Many have been waiting anxiously for the opportunity to undo the annuity they were forced to buy and will feel let down by today’s announcement that the secondary annuity market is being scrapped.

Many will be stuck for the rest of their life with an annuity they never wanted:  This was never likely to be a huge market, but for some individuals it would have been a potential lifesaver.  Those who bought an annuity because they were forced to do so, but would not have purchased one unless the law required it, have been waiting desperately for an opportunity to sell it but that opportunity is now being taken away from them.

Consumer protection is, of course, vital but the Government announcement of another overhaul of financial guidance has meant PensionWise cannot now help people before April 2017:  Of course it is vital that consumer protection is put in place to help people understand the value for money they would be offered, but that was going to be offered by financial advisers and PensionWise.  The Government’s most recently announced overhaul of financial guidance has made the Pension Wise route impossible because the whole guidance landscape is now up in the air.  PensionWise Guiders were waiting to be trained to give the guidance for people before the secondary annuity market started in April 2017, but the latest announcement of further rethinking of the Government’s free help for customers has resulted in today’s decision.

Being able to sell the annuity would be better for many than being stuck with a small lifetime income, with no inflation or spouse protection: The Treasury says that only 5% of annuity holders would want sell back their annuities  but this is still a huge number of people.  Around 600,000 annuities were being sold each year and most of these products offered no protection against inflation and did not ensure a spouse would be covered.  Some of those buying annuities would have had other pensions, many from a final salary-type scheme, so they did not need this extra guaranteed income but had to buy it because that was the law at the time. Unless they had very large pension funds, they had no choice but to buy an annuity, whether they wanted to or not.  5% of those buying annuities amounts to around 30,000 people a year who might want to exchange their small annuity income for a cash lump sum.  In many cases, the annuity that they bought has no inflation protection and does not provide for their spouse, whereas having the cash would allow them to make provision for their partners or repay debts.

This aspect of pension freedoms is being abandoned and will leave many disappointed:  It is a shame that this aspect of the pension freedoms is being abandoned and that the overhaul of pensions guidance seems to have undermined a potentially valuable service for people who will now be stuck for life with an annuity that they did not want to buy and may not be the most suitable product for their retirement needs.  It was never going to be a huge market, but for some people it would have been a real benefit to be able to undo their annuity.

October 18, 2016   2 Comments

FCA study of annuity selling highlights worrying failings

14 October, 2016

FCA finds clear evidence of annuity mis-selling to customers in poor health but process of investigation and redress is painfully slow

  • Seriously ill customers short-changed for the rest of their shortened life – need swift action
  • Tens of thousands in line for redress
  • At least one in three firms have failed customers and will have to compensate
  • FCA findings welcome but customers need urgent action not still more reviews

FCA findings from its investigation of whether annuity customers in poor health were treated fairly: The FCA has just released its findings following an investigation into how annuities have been sold. Link here . The results are further proof that the annuity selling process has failed customers.

Customers in poor health have been short-changed on their pension income for the rest of their shortened lives: In 2008, the FSA first reported that annuity companies were not treating customers in poor health fairly. Since then, companies were supposed to change their practices to ensure they treated customers fairly, but here we are, eight years on, and not enough has been done.

At least one in three annuity companies has been found guilty of serious failings: Seven firms were investigated and a ‘small number’ were found to have seriously failed customers and will be required to pay redress. If this ‘small number’ is two firms that still represents 30% of the firms. If it is three firms, that represents over 40% of the sample.

FCA is only just starting to look at others, but still not the whole market: On the basis of its findings so far, the FCA is now going to investigate some of the other providers. Of course it is good that this issue is receiving more attention, but we are already another two years on and it will still not be looking at all of them. Many of the smallest companies may have had the worst practices, yet their customers are not being helped at all. The FCA’s Report today will still not help all the customers who were sold inappropriate annuities in past years.

Study found ‘relatively high incidence’ of failure of process and breach of FCA rules: It is worrying that the FCA study found that most of the firms were not selling annuities properly. Such failures are of concern, even if the FCA concludes that people may not have suffered losses in the majority of cases. Given the huge numbers of people involved, even a small proportion of customers is a large number of people.

Tens of thousands already in line for redress but may be many more to come: The FCA indicates that its findings could mean at least 90,000 people will need compensation for wrongly sold annuities, but it is still investigating more firms and there is bound to be more redress due. This is taking many years. Urgent action is so important because the annuity market since 2008 has covered over three million people. Many of those worst impacted by any failure were in poor health and will have been living on much lower incomes than they are entitled to, some may have already died. At the moment, these annuities are completely irreversible so customers will be poorer for life if they receive no redress.

There were no proper suitability checks or requirements to ask about health: The way annuities have been sold, without any suitability or ‘know-your-customer’ checks, makes it inevitable that many people will not have had the chance to make best use of their hard-earned pension savings. Companies were not required to ask customers about their health. They did not have to tell customers that a standard annuity assumes they are in excellent health and will live longer than average. So customers often had no idea that if they had past health issues, such as heart trouble, high blood pressure and so on, they could have obtained higher income by buying a different type of annuity.

Just sending a leaflet is not enough to address customer detriment on annuities: The FCA only requires firms to send written communications i.e. an official leaflet that describes the different types of annuities, or something equivalent. But most people do not know anything about annuities. Most customers, who will only ever buy an annuity once in their life, have no idea what the words ‘enhanced’ or ‘impaired life’ annuities mean for them. The asymmetry of knowledge and power works against customer interests in this market more than most others.

Frustrating that it is taking so long for redress for those affected: It is very sad to see that so many years have already passed and redress is only just now being considered. And this will not apply to all customers, with other firms only just starting to be investigated. I would like to see much quicker action, given the importance of annuity income to pensioners in poor health

FCA must monitor how second line of defence is working for annuities sold since 2015: The requirement for most people to buy annuities was thankfully abolished in the 2014 Budget, but many people are still buying an annuity to secure a lifetime guaranteed income. The Government promised there would be better checks to protect annuity customers, and the FCA needs to investigate how this so-called ‘second line of defence’ is working in practice. The proportion of customers buying from their existing provider has been rising and that suggests there may still be a need to improve selling processes. In particular, the FCA needs to ensure customers who are not in excellent health do not just buy a standard annuity. Greater use of PensionWise free guidance would help give customers a better chance to buy the right product.

October 14, 2016   Leave a comment

Cridland State Pension age independent review: interim report.

13 October, 2016

Here are my thoughts and comments on the Cridland State Pension age independent review: interim report.

As Cridland considers the options, Government has a chance to make State Pension policy fairer

Consider extending number of years for full pension, rather just than raising state pension age

  • Current system gives higher state pension to people healthy or wealthy enough to wait and work longer, but often disadvantages those with longest working lives or poor health
  • Continually increasing State Pension Age is not best way to control state pension costs
  • State Pension is based on contribution principles – but 35 years is not a full working life
  • Requiring longer contributions for full State Pension would allow long-service workers to get full State Pension sooner if they need to
  • New State Pension rules has made state pension less fair – people may now pay full National Insurance for more than 15 years, for no extra State Pension
  • Under old State Pension, people could build up more State Second Pension every year but new State Pension means no extra State Pension after 35 years
  • National Insurance makes no provision for social care – Beveridge would have ensured such insurance

I am delighted to see that John Cridland has released his interim Report on how to manage State Pension Age policy in the long-term.  I believe there are important issues that need to be opened up to national debate and it is good to see them starting to be aired.  Cridland is right to focus on the three pillars – affordability, fairness and fuller working lives. These are all important issues and can help frame the way State pensions policy works better in future.


Current system gives higher state pension to people healthy or wealthy enough to wait and work longer, but often disadvantages those with longest working lives or poor health

The current State Pension system is increasingly seen as unfair.  Those who reach state pension age in good health and with other private income can keep on working or waiting longer and achieve much higher state pensions when they do finally take them.  Under the old system, people could get an extra 10.4% a year state pension for each year they delayed starting to take it.  Under the new State Pension, people can still get an increase of 5.8% a year in State Pension if they can afford to delay their start date.  By contrast, people who desperately need their state pension before they reach state pension age cannot receive any money at all and State Pension age has been rising sharply, as indeed has the age at which Pension Credit can start being paid to both men and women.  This means the current system is penalising those who are in poor health, possibly due to having had very long working lives in physically demanding jobs.  Socially, such a system seems inequitable and the groups with lowest life expectancy lose out significantly.  This includes people in lower earning groups, but there are also major occupational, regional and income differentials in average life expectancy which have so far been ignored by the state Pension system.  The current rules favour higher earners, living in more prosperous areas and who have less strenuous jobs, or are in good health.  A balance needs to be struck between controlling costs and improving social fairness.


Continually increasing State Pension Age is not best way to control state pension costs – just look at the problems with Women’s State Pension Age changes

The Government should carefully consider whether just increasing state pension age is the optimal way to control costs.  I believe there needs to be a different mechanism than purely using average life expectancy, or chronological age.  A more considered approach would focus on length of working life and number of years contributing to the National Insurance system.  At the moment, the dice are all loaded in favour of the healthier and wealthier members of society, who get more State Pension per year and for more years than other groups.


State Pension is based on contribution principles – but 35 years is not a full working life

The National Insurance State Pension has always been based on the contribution principle – if you contribute to the country for enough years, you will be entitled to a full State Pension.  When Beveridge designed our system, he considered a full National Insurance record would be 44 years for men and 39 years for women.  Since the 1940s, average life expectancy has increased significantly but the number of years for a full record is now only 35.  If you have lived in the UK all your life, 35 years cannot possibly be considered a ‘full’ working life.


New State Pension rules has made state pension less fair – people may now pay full National Insurance for more than 15 years, for no extra State Pension

Those who left school at 16 would be just 51.  Those who went to university and started working at 21 would be just 56.  That means, people will be contributing National Insurance for many years, but will not get any more state pension at all.  By contrast, those who have only lived in this country for part of their lives could get the same State Pension as people who have lived and worked here much longer – and paid far more into the National Insurance system overall.  National Insurance contributions from both employee and employer amount to over 25% of average salary – yet no further pension accrual will be earned for this sum once people reach the 35 year threshold, meaning many people who did not go to higher education will be disadvantaged in the State Pension system.


Under old State Pension, people could build up more State Second Pension every year but new State Pension means no extra State Pension after 35 years

The unfairness of the State Pension system has been exacerbated by the new State Pension that started in April 2016.  Under the new system the old rules that allowed people to keep on building some State Pension every single year have been abolished.  Before April 2016, people could build up extra State Second Pension (S2P – the earnings related part of the State Pension) every year until they reached State Pension age.  They would have built up a full Basic State Pension after just 30 years, but at least they could go on accruing more S2P each year, so their National Insurance contributions would give them some extra State Pension in retirement.  (Those who were contracted out would be paying lower National Insurance and building up a replacement for this S2P in their private scheme).


Requiring longer contributions for full State Pension would allow long-service workers to get full State Pension sooner if they need to

Therefore, the idea of increasing the number of years required for a full State Pension makes sense.  In future, rather than increasing State Pension age just because ‘average’ life expectancy has risen, it could be fairer to increase the length of time required for a full State Pension instead.  If you reach State Pension age without a full record, you could still receive the relevant fraction of the State Pension – for example if you require 45 years and you have 40 years on your record, you would still get 40/45ths of the full amount.


Those caring for children or adults would still get credits towards their record, as would the unemployed or those who are too ill to work.

As with the current system, anyone who takes time out to look after their children or caring for older people, or unemployed or too ill to work would receive credits so that this does not damage their National Insurance record.


National Insurance makes no provision for social care – Beveridge would have ensured such insurance

The current National Insurance system is geared towards regular pension payments only.  However, if Beveridge was designing the system today, he would certainly want to include an element of insurance to cover social care costs.  Beveridge could not have imagined millions of elderly people living as long as they do now, being such a growing proportion of the population.  In the 1940s, life expectancy was much lower and medical research had not developed to allow people to live with chronic conditions until much later.

The measure of ‘up to’ one third of adult life living on a state pension is far too crude.  Given the vast differentials in life expectancy across the country and across occupational or income groups, this arbitrary measure hides significant unfairnesses.  A more sophisticated and equitable approach is required.

October 13, 2016   2 Comments

Time for a national inquiry into the impact of lower interest rates.

13 September 2016

  • Time for a proper national debate about the impacts of Monetary Policy
  • Government should launch an inquiry into the effects of lower interest rates

 Main points:

  1. QE was an emergency policy to stave off depression – it is a huge monetary experiment which must not be considered as ‘normal’ policymaking
  2. The latest round of rate cuts and QE may well have been a mistake – in August 2016 we were not facing economic collapse and the negative side-effects need to be considered
  3. Monetary policy may not be working as theory predicts as banks have failed to pass on lower rates to many borrowers, while savings rates have fallen sharply
  4. Credit card, overdraft and even SVR mortgage rates have RISEN over the past 5 years
  5. Lower rates and QE are supposed to be expansionary but also have deflationary effects as they reduce disposable incomes for both households and some corporates
  6. QE has damaged UK Defined Benefit pension schemes and placed higher costs on firms
  7. QE has increased annuity costs significantly which also damages Defined Contribution pension income
  8. Distributional effects of QE may have political implications as ordinary savers and renters suffer while QE helps the wealthiest, perhaps feeding public dissatisfaction

 This paper presents an alternative view of monetary policy to that which has been used by the authorities.  I suggest that monetary measures have impacts that are rather like a tightening of fiscal policy, which may offset the expected expansionary effects.  I hope you will find this of interest and that it may stimulate more detailed debate of the real impacts of the unprecedented policy experiment which is underway.  The Bank of England believes its latest rate cuts and QE expansion will boost growth.  The Governor says he is serene about its policies.  However, the full impact of the QE experiment will not be known or understood for many years, while its negative side-effects may have been underestimated.

No economic emergency:  QE was originally introduced as an emergency measure to boost growth and stave off economic collapse. However, with record employment levels and no recession (let alone depression as was feared a few years ago) it is hard to argue that interest rates in August 2016 were ‘too high’ or were stifling spending and investment.  Indeed, economic indicators have recovered somewhat, the economy is certainly not facing imminent collapse, so aggressively pushing rates lower from already exceptional levels may not be an appropriate policy.

QE is not normal:  It is worrying that this massive monetary experiment of printing money to artificially distort long-term interest rates may now be considered ‘normal’ – it is certainly not normal at all.  Indeed its effectiveness is unclear.  It may do more harm than good and if any post-Brexit economic weakness is structural, rather than cyclical, monetary easing is unlikely to help.

The combined impact of low interest rates and more QE reduces the disposable incomes of savers and pensioners.  In some respects, monetary policy is acting like a tax increase, so attempts to ‘ease’ monetary policy have effects that resemble a tightening of fiscal policy.  Soaring house prices and rising rents have reduced younger people’s spending power, while savings and pension income for older groups have been cut. In an aging population, the expected income, substitution and wealth effects may fail to work as theory predicts.  The table below is a quick summary of the relative balance of impacts.  The net effect of the Bank of England’s policies depend on the strength of each of these effects.

Reflationary impacts expected by Bank of England Deflationary effects that may offset expected expansionary impacts
As interest rates fall, net savings fall and savers are expected to spend more Lower savings income may lead savers to spend less
As borrowing costs fall, corporate borrowing for capital investment is expected to increase QE increases pension deficits, so higher company pension contributions may lower corporate investment
Lower borrowing costs for households are expected to help them afford to spend more Lower pension income may mean less spending as annuity income falls for new pensioners
As QE increases asset prices (e.g. house prices), a wealth effect is expected to boost spending as asset owners feel wealthier Higher rental costs as house prices rise  may reduce spending and higher house prices may lead to higher savings to afford to buy homes
Income effects of lower rates for both savers and borrowers are expected to reduce saving and increase spending As savings income falls, savers may actually spend less or save more to afford housing
A Substitution effect is expected as rates fall and households or corporates are expected to bring forward spending plans which will boost growth Households and corporates may believe QE and falling rates signal economic problems ahead and reduce spending.  There are also concerns that continually bringing forward future growth cannot continue indefinitely


The monetary policy transmission mechanism is not working as theory predicts:  Let’s look at the impact of the Bank of England’s policies.  The first part is the fall in short-term interest rates as bank rate has fallen closer to zero.  The second policy element is the Bank’s Quantitative Easing programme designed to lower long-term interest rates too.

  • Lower short-term interest rates

Low short-term interest rates are meant to boost household spending:   Households are expected to increase their borrowing as loans become cheaper and savers are supposed to reduce net saving as their income falls.  In fact, the pass-through of low short rates has been weak, as banks have not reduced borrowing rates much, if at all, but have lowered savings rates more significantly.  In an aging population, savers facing falling income may not just increase their spending.  They may look for better returns on their savings, or even save more for the future.

 Though short rates have been near zero for years, many household borrowing rates have actually risen:  Over the last five years, credit card interest rates and bank overdraft rates have actually increased, despite low base rate.  Indeed, credit card rates and overdraft rates are 2% higher than they were in August 2007.  Clearly, banks have not been passing on the benefit of low interest rates to these borrowers.  Therefore, low rates will have less impact than theory predicts.

Even mortgage rates have failed to properly reflect the base rate cuts:  In August 2016, average 2-year fixed rate mortgages had an interest rate 1.17% lower than five years ago.  However, rates for an average Standard Variable Rate mortgage were higher than in August 2011.  Lenders are also charging households higher fees and imposing tougher conditions on loans.  Therefore, ordinary households have not really felt as much benefit from the ultra-low interest rate environment as might be expected.  And even though fixed rate mortgage costs have fallen, the rise in house prices means the size of a mortgage required for house purchase has increased.  For many people the costs are so high relative to their income that they cannot get a mortgage at all.


Date Credit Card  %




Rate %

Standard Variable Rate Mortgage % 2-year fixed


75% LTV %

Aug 2011 16.73 19.38 4.11 2.69
Aug 2012 17.26 19.53 4.27 3.54
Aug 2013 17.87 19.54 4.36 2.8
Aug 2014 17.39 19.67 4.52 2.74
Aug 2015 17.91 19.67 4.48 1.72
Aug 2016 17.96 19.68 4.33 1.52
Interest rate change over past 5 years +1.23% +0.3% +0.22% -1.17%

Source:  Bank of England

Of course, over the past five years, savers’ interest rates have fallen sharply:  While the above table shows the low interest rate environment has not fully fed through to borrowing costs, the average interest rates for savers have fallen quite significantly over the past five years.  Banks do not need savers’ deposits as the Bank of England gives them plenty of cheap funding, while the latest Term Funding Scheme helps further.  .  Thus, interest rates on Cash ISAs, fixed rate ISAs and fixed savings deposits were significantly lower in August 2016 than five years ago. Banks have cut saving rates by more than the base rate fall and cut borrowing rates by less, to boost margins



Date Cash ISA 1 yr fixed ISA 2 yr fixed Deposit rates
Aug 2011 2.37 2.54 3.08
Aug 2012 2.52 2.53 3.08
Aug 2013 1.26 1.74 1.93
Aug 2014 1.09 1.5 1.52
Aug 2015 1.01 1.51 1.55
Aug 2016 0.6 0.94 1.02
Int. rate change -1.77% -1.6% -2.06%

Source:  Bank of England


  • Quantitative Easing

The second part of the Bank of England’s policy has been forcing long-term interest rates down, by creating billions of pounds of new money to buy gilts.  Buying more gilts forces up gilt prices which means lower yields, but also artificially distorts these supposedly ‘risk-free’ assets.

Bank of England suggests QE protects the value of savings and wealth, but higher asset prices are irrelevant to cash savers:  The Bank of England claims QE has boosted the value of financial asset holdings and that this ”protects the value of savings and wealth”.  However, asset prices are irrelevant to cash savers.  Most people’s savings are in deposits of less than 2 years’ maturity, so they do not benefit from increases in asset prices resulting from QE.  The majority of households hold their savings in bank or building society accounts, ISAs and National Savings which have been damaged by the low base rate policy and have not necessarily benefited from QE.

QE has distributional impacts as rising asset prices helps the wealthiest:  The Bank of England admitted in 2012 that ”those households with significant asset holdings will benefit by more than those without”.  It said it had boosted the value of stocks and bonds by £600bn and that this is ‘equivalent to £10,000 per person if assets were evenly distributed across the population’. But assets are not evenly distributed so gains have gone largely to the wealthiest 5% of households.  Further QE merely magnifies those effects.  The Chart below shows the Bank of England’s 2012 estimates of the redistribution of wealth resulting from QE.  The ongoing and further rounds of QE exacerbate this redistribution of wealth, with the wealthiest households becoming even wealthier.

QE has deflationary effects which may undermine its effectiveness:  QE is designed as an expansionary policy, but some of its effects are similar to a tightening of fiscal policy.  There are several ways in which QE has deflationary side effects.

High house prices can be deflationary:  The Bank of England has suggested that its policies have supported house prices and that this benefits the economy.  However, artificially boosting house prices is not necessarily reflationary.  The wealth effect of high house prices may not be strong enough to offset the income effects of falling disposable incomes for renters or those saving more to try to get on the housing ladder.  Housing wealth is not evenly distributed, with significant regional, demographic and income disparities.  The high cost of housing relative to salaries prevents younger generations getting on the housing ladder and forces up rental costs.  Rather than supporting house prices, policy needs to address the shortage of housing by building more homes.

 Lower gilt yields damage UK Defined Benefit pensions:  The Bank has underestimated the dangers of low gilt yields for company-sponsored pension schemes.  Artificially depressing long-term interest rates increases pension deficits and imposes extra costs on companies sponsoring pension schemes.  Deficits have soared to nearly £1trillion on some estimates.  All measures show rising deficits for UK pension schemes following the latest gilt yield falls.  The Bank of England itself is insulated from the effects, because its own scheme has ‘employer’ contributions of over 50% of salary which are funded by levypayers.  Private sector firms are struggling to meet these costs and addressing their ballooning pension deficits will weaken their business.  As firms put more money into their pension schemes, they have less money to spend on expansion and job creation.  For example, Carclo had to withdraw its planned dividend payment in order as a result of its pension deficit.  Pension funds are becoming locked in a vicious circle.  The more the Bank of England buys gilts for QE, the more expensive – and unaffordable – it becomes for trustees to buy assets to try to reduce risk.  If they compete with the Bank of England to buy more gilts, they drive gilt prices up more, which increases their deficits even further.  For many schemes, this can be a ‘death spiral’.  Some firms have been bankrupted as a result of their pension problems.  QE makes Defined Benefit scheme funding seem like a bottomless pit.  The Bank’s insouciance on pension issues is troubling.

QE has driven up the cost of buying annuities but Bank of England has ignored this effect:  The impact of QE on annuity rates has not been investigated.  This may be a serious omission.  Rising annuity costs have potentially serious implications.  QE has forced up the costs of buying bulk annuities, making it too expensive for companies to remove defined benefit pension liabilities from their balance sheets.

QE has damaged Defined Contribution Pension savers too:  In addition to the problems created by increasing annuity costs for employers running Defined Benefit schemes, annuity problems can affect ordinary households too.  Retirees buying an annuity will have lower incomes for life as a result of QE and will never be able to recover their losses.  In 2012, the Bank of England claimed: ”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.”  This conclusion is flawed.  Most ordinary investors’ Defined Contribution pension savings are invested in with-profits or insurance funds which have not performed well enough to offset annuity falls resulting from QE.

QE artificially distorts asset markets – nobody knows what this means:  Gilts are supposed to be ‘risk-free’ assets, but by artificially boosting gilt demand, the Bank of England has distorted gilt prices.  Thus, QE has added risk to gilts, potentially creating an asset bubble in the very market that is supposed to be risk-free and on which other asset valuations are based.  This adds risk to all financial assets and nobody knows what the medium term impacts will be. Printing new money and debasing a currency may be politically expedient short-term political palliatives, but will usually fail to solve underlying problems and generally have damaging long-term consequences.


In summary, monetary policy may not work as the Bank of England’s theoretical models predict:  This paper suggests that the current stance of monetary policy and the most recent policy decisions may not work as intended and have damaging side-effects that could even offset any expected stimulus.  So what other measures might Government consider for boosting growth, with less damaging side-effects?

As QE operates indirectly and its transmission mechanism may not work, direct stimulus might be more effective:  QE creates new money which is intended to find its way into the real economy to boost growth.  However, the transmission mechanism is indirect and the Bank of England cannot ensure that this newly created money does go where it is needed in order to create growth and jobs.  There may be better policies to pursue, for example:

  • Temporary tax breaks for capital projects: Introduce temporary tax breaks for capital spending to encourage companies to bring forward investment plans.  The biggest benefit of QE is that it has allowed companies to borrow more cheaply and large firms are flush with cash.  However, they are not spending it, so an incentive to invest could help economic activity.
  • Boost construction:  Introduce incentives for new housebuilding or construction
  • Use pension assets to build new housing: The UK has billions of pounds in pension assets which could be used to build new housing, rather than trying to invest in gilts.  This can help to deliver better returns as well as overcoming the UK housing shortage.
  • Use pension assets to invest directly in infrastructure with Government underpin:  Using the billions of pounds of pension assets to bypass banks and invest in infrastructure or even lend directly to small firms would offer more direct stimulus.  It may require a Government to guarantee that the pension assets will receive at least a gilt yield return over, say, 1 years, if the project does not return more than the yield on 10 year gilts.  This would mitigate some of the risk for the pension scheme and allow pension funds to use these potentially higher return assets in the liability-matching portion of their asset allocation, while hoping to benefit from higher returns as well.
  • Consider ‘helicopter’ tactics:  It might be more effective if the Bank had sent a “time limited” cheque to all households, rather than letting low interest rates continue to squeeze people’s income. This would encourage spending directly.  The Bank of England rules this out, but it is possible that it would be more expansionary than QE.  In fact, the £25billion paid directly to households since 2011, in the form of PPI compensation, may have boosted growth more than the low base rate and gilt-buying program.


Conclusion:  QE, coupled with ultra-low rates, is supposed to be expansionary, but some of its effects are deflationary.  It is not yet clear whether the expected expansionary impacts are being more than offset by the contractionary side-effects.  Indeed, if any economic weakness following Brexit is structural, rather than cyclical, then monetary policy will not work as expected.  In some ways, QE and the base rate cuts have acted rather like a tax increase.  They have reduced current and prospective disposable incomes.  Savings income, annuity income and prospective pension income are all lower as a result of the Bank of England’s policies.  Monetary Policy can buy time for Government to introduce new demand-stimulus measures, supply-side reforms and reducing fiscal imbalances.  But, without other measures, buying gilts is unlikely to generate growth.


And finally, some politics…The Bank of England’s policies have distributional effects and the Government has perhaps not sufficiently recognized this.  The following table summarises which groups have largely benefitted from monetary policy moves and which groups are damaged by it, with the wealthiest gaining while ordinary savers, renters and younger households lose out.  Might it be possible that monetary policy could have contributed to the dissatisfaction among voters who feel left behind in recent years.  The rise of anti-establishment nationalist movements, epitomized by the Brexit result, may reflect anger at the financial difficulties facing some parts of the population, which policymakers have failed to recognize.  Politicians might like to consider how this balance of winners and losers fits with a desire to help the many, rather than the privileged few.

Groups benefiting from monetary policy


Groups damaged by monetary policy

Wealthiest asset owners

People trying to buy a home

Investment firms

People renting a home


Savers relying on interest income

UK Government

Pensioners buying annuities

Borrowers with large tracker mortgages

Companies with defined benefit schemes

Gilt traders or market makers

Pension scheme members whose schemes failed due to QE impact on deficits


September 13, 2016   3 Comments

Unbelievable injustice – flaw in British law must be remedied urgently

16 September 2016

  • Frightening flaws in UK law uncovered – urgent changes are needed
  • British law allows firms to sue you without you knowing about it – this is an outrage
  • Over 2000 people a day have Country Court judgements against them and have had no defence

Have you ever moved house?  Have you ever sold a car?  Have you ever parked your car in a hospital or supermarket car park?  If so, it might be a good idea for you to check your credit record.  You may find you have a County Court Judgment (CCJ) against you that you know nothing about.

Last year, three quarters of a million CCJs were issued by our country Courts by default, no defence was put in by those being sued and the cases did not even come to Court.  They were just signed off electronically.  But the consequences of those judgments for the people involved can be catastrophic.

It is frightening to learn that British justice allows County Courts to issue a judgment against you in this careless manner, without you ever receiving proper notification, having no chance to defend yourself against alleged debts and the case never even being heard in open court.

The Daily Mail has uncovered shocking evidence of the increase in the numbers of CCJs being issued without any defence being heard.  In the past three years, the number of CCJs issued with no defence lodged has increased by 40%.  Last year, over 2000 every day.  Nearly a million families have had judgments against them, for alleged unpaid utility bills or parking fines which they often know nothing about – and which may not have anything to do with them.    Many firms are making money easily in this way.

You often only discover this if you try to take out a loan or a mortgage and are refused.  Once the CCJ is issued against you, it is lodged on your credit record and you have to go to Court to get it rescinded.  This costs £255 and can take many months.  In the meantime, you will be denied the finance you need.

Examples of this injustice are astonishing.  The person who sold their car, told DVLA about it, the new owner parked in a private car park and received a ticket.  The Parking firm wrote to the previous owner, at an old address, because they apparently received incorrect information.  So the previous owner had no idea there was any problem, the parking firm did not have to prove to the Country Court that they knew who the owner of the car was at the time, nor that they had given the person they were suing a chance to defend themselves.  No proof that they even knew there was any claim against them.

In another example, a young man left university digs, told the water company they were moving and gave them their new address, but a bill was sent to the old address.  The bill was never paid because nobody knew about it, but a CCJ was then issued against the young man.  When he wanted to buy a house he was refused a mortgage because of an unpaid bill nobody told him about.

Here are links to the Daily Mail investigation articles:

This is not justice.  In any other sphere, someone trying to sue you, or requiring you to pay overdue debts, is required to make stringent efforts to contact you and ensure you have received the summons.  For example, landlords trying to contact wayward tenants must prove they have taken all reasonable steps to ensure you have received the information about the case and had a proper chance to defend yourself.  But when it comes to the County Courts, apparently this is not the case.

To check whether you have a County Court judgement against you, you can search or

Ministers must urgently remedy this flaw in the law.  It should be a requirement, before any CCJ is issued, that the person suing for payment proves to the court it has taken all reasonable steps to trace the defendant, is sure that the person they are naming is the relevant person responsible for the bill and that if it comes to light the firm did not take sufficient care to trace the defendant they should face penalties.

September 12, 2016   1 Comment

Bank of England pension scheme shows dangers of QE

12 September 2016

  • Bank of England’s own pension scheme highlights the problems of QE
  • Bank says QE should make gilt owners rebalance portfolios into riskier assets – but BofE pension scheme isn’t doing this
  • QE may not work as pension funds and insurers are constrained from taking more risk
  • As QE worsens pension deficits and has pushed contributions to ruinous levels – Bank of England scheme requires employer contributions over 50% of salary

The Bank of England has recently published its Annual Report and Financial Statements for the year ended February 2016.  It makes interesting reading.  Despite being invested totally in gilts and bonds, the scheme has had to overcome a deficit and, by end February 2016, the deficit was reduced.

Bank of England is relatively insulated from pension impacts of its own policies:  However, the Bank of England Pension Scheme Report acknowledges it was damaged by falls in long-term interest rates and clearly the latest round of QE will cause further problems.  However, the Bank’s scheme is relatively insulated from some of the negative impacts which the Bank of England’s policies have inflicted on private sector schemes.  This is because levy-payers fund the enormous employer contributions which have been required to overcome the deficit, while Bank of England employees do not contribute at all.  The Bank itself, as an employer, does not face the cost pressures that private sector firms are under as contributions need to keep rising.  This may help explain why the Bank of England seems so complacent about the pension problems created by its policies.  However, the problems are real for most employers and may undermine the effectiveness of QE itself.  These side-effects need to be taken more seriously.

BofE pension scheme holds only bonds and they have not kept up with liabilities:  The Bank of England’s pension scheme is invested entirely in bonds and has a deficit.  In the year to February 2016, its pension scheme assets increased by 4.5% but its liabilities rose by 5.14%, meaning that, even with its asset allocation entirely in the safest bonds, which are supposed to match the liabilities, the assets did not actually keep up with liabilities.

Falling bond yields mean rising pension deficits:  The Bank’s pension fund Report acknowledges that QE imposes ‘yield risk’ which worsens its pension deficit, even though the scheme is only invested in bonds.  It states ‘the liabilities would be expected to grow by more (than the assets) in monetary terms, increasing the deficit’. The conventional wisdom that bonds will match pension liabilities is not reliable and either extra returns are required, or employers must pay significantly more to support their schemes.

BofE pension scheme has employer contributions well over 50% of salary:  The Bank of England scheme required employer contributions of well over 50% of salary for the year ending February 2016.  It also pays all the administration and PPF costs, on top of the employer contributions.  Such costs would be ruinous for most private sector employers struggling to fix their defined benefit pension deficits.  .The latest round of QE will have worsened deficits again, thus increasing costs of running UK Defined Benefit schemes, and requiring further contribution increases.  Some pension purists are suggesting that employer contributions will just have to keep on rising and sponsors will keep having to increase funding, however QE is supposed to boost growth and these pension impacts are damaging many parts of the corporate sector.

QE is meant to be expansionary as institutions switch to riskier assets – but even BofE scheme isn’t doing this:  Since the Referendum the combined impact of Brexit uncertainty and the £70billion QE boost has led to a significant further drop in long yields.  The Bank of England says QE will impart monetary stimulus and “trigger portfolio rebalancing into riskier assets by current holders of government bonds”.  It expects QE to be expansionary because it boosts asset prices, as sellers of the bonds it buys will switch to higher yielding – riskier – assets.  But even the Bank of England’s own pension scheme is not switching to higher risk assets.  Most institutional investors, such as pension funds or insurers, do not take more risk due to regulatory constraints.  Therefore, QE may not be working as intended.  This helps to explain why the Bank has already struggled to find enough bonds to buy.

Pension impacts of QE are deflationary:  The pension side effects should be taken more seriously by the Bank of England when assessing the effectiveness of QE.  Many employers struggling to support their pension schemes are coming under pressure to increase contributions, meaning less resources available to grow their business.  Recently Carclo had to pass its dividend because of its pension deficit, which may damage the firms’ long-term prospects.  Smaller employers are facing bankruptcy.  QE will potentially require even more corporate resources to be diverted from productivity enhancing investment into pension deficit funding and will weaken corporate balance sheets.  This is hardly expansionary.

UK pension funds and insurers are a large proportion of the economy:  In an economy with such an enormous accumulated value of funded pension schemes relative to its size – the UK has more in funded pensions than the rest of Europe put together – the pension damage of QE could well dampen growth prospects and damage growth, the opposite of its intended effect.

QE impact on annuity rates adds further deflationary pressure:  Not only does QE distort the capital markets and increase pension deficits, it has also caused potentially even worse damage to annuity rates.  This has deflationary effects.  Firstly because companies cannot afford to buy-out their pension risks as the costs have risen so high and secondly because individuals buying annuities will have lower incomes for the rest of their lives. The combination of pension regulation and financial regulation is conspiring to magnify the negative impacts of QE and, in an aging population, this increases the likelihood that monetary policy is having side effects that undermine its efficacy.

In any case, gilt investments do not actually match pension liabilities:  Although gilts and bonds may be a proxy for liabilities, they are not a proper match, due to duration and inflation mis-matching, credit risk in corporates and longevity risk too.  The Bank of England scheme is testament to that.  Therefore, ‘de-risking’ by just holding bonds will not necessarily stop deficits worsening.  As demand for bonds rises, long-rates fall further, which increases pension deficits and imposes punishingly high contribution rates on employers.

Pension funds need to find alternative and higher sources of return:  Artificially boosting asset prices is likely to result in asset bubbles – and further QE gilt-buying may simply aggravate the bubble in the gilt market, that is meant to be ‘risk-free’.  Relying just on bonds could be dangerous but there are no easy answers to the pension investment conundrum.  Higher returns and increased diversification could come from infrastructure or housing investment, with a Government underpin perhaps, that will boost economic activity as well as offering potentially better returns to meet pension liabilities.

Use pension assets to boost growth directly rather than relying on QE:  The Bank of England’s pension scheme shows that just investing in gilts and bonds is doomed to failure because it entails such huge employer costs and still carries deficit risks.  As the effectiveness of QE and further monetary measures is open to question, using the billions of pounds in long-term investment funds to boost growth more directly makes more sense than relying on indirect transmission mechanisms.

September 12, 2016   3 Comments

Government must tell people that State Pension age will be 66 soon

11 September 2016

  • Government must make sure people know that by 2020 you won’t get your State Pension at 65
  • DWP should learn lessons from the failure to adequately inform women about past changes
  • In four years’ time the State Pension Age will be 66 – DWP must publicise this properly

By October 2020 the state pension age will be 66, so nobody reaching age 65 will get a state pension.  I am concerned that millions of men and women in their early 60s still don’t know this.

State pensions are the bedrock of retirement security for many people, so the Government must take proper care when managing a policy that will affect so many people so profoundly.

DWP should take more care to ensure people know about State Pension Age rises:  Having witnessed the problems caused by its failure to ensure women knew about the forthcoming rise in their state pension age, it is important that proper care is taken to alert people to the fact that 65-year olds will no longer be eligible for State Pensions from 2020. People need to know.

A major national advertising campaign could help:  Advertising in newspapers, radio and even television can help to ensure as many people as possible know they won’t get their State Pension at age 65 and allow them to plan accordingly.  The DWP has spent huge sums advertising the new State Pension and for State Pension Top-Up, but not for State Pension Age changes – even though such a publicity campaign is far more important than using public money to promote State Pension top-up, which is unsuitable for many people and will only help tiny numbers of pensioners, most of whom are well-off.

DWP should learn from problems it caused older women:  The DWP does not seem to have learned enough from the problems it caused for older women who have seen huge increases in their State Pension Age.  The WASPI campaign highlighted the anger and hardship felt by many women who were unaware their State Pension Age would no longer be 60.

WASPI campaign resulted from inadequate publicity of past pension age rises:  Despite having 15 years to inform women of the significant changes introduced by the 1995 Pensions Act, which legislated that women’s state pension age would increase by up to 5 years after 2010, the DWP failed to ensure that they knew.

Both men and women’s State Pension ages will be rising in next couple of years:  Then, in 2011, the Government decided to impose a second increase in these women’s State Pension age, this time with only five years’ notice, while men’s State Pension age would also start rising within seven years.

Digital Statements and letters are not enough:  It is true that anyone who uses the new digital State Pension forecasts will see their State Pension Age, and letters have been written to those affected, but this is not enough.  Many people are not on-line or do not yet know about the digital statements.  Many will not have received the letters that were sent to them.  It is crucial to ensure everyone knows what is happening to their State Pension age and a national advertising campaign is urgently needed to tell people.



  1. Anyone who wants to check their State Pension Age can use the calculator below
  2. State Pension top up is also called ‘Class 3A National Insurance’ contributions – it is not suitable for everyone.  People who reached state pension age before April 2016 are being offered the chance to buy extra State Pension.  It is vital that people check whether this scheme is suitable for them before giving their money to the Government.  The cost can be many thousands of pounds, so they should not really buy extra pension without getting advice to know if this is the right thing for them.  Someone who is aged 68, can buy an extra £25 a week State Pension for life (that is the maximum available) but would have to pay £20,675 to the Government for this.  Even buying an extra £10 a week State Pension would cost a 65 year old £8,900.  Most pensioners will not have that kind of spare money lying around that they would want to use for a bit of extra State Pension.  If they are not in good health, have no partner, die soon after investing, or have gaps in their National Insurance record, this State Pension top-up may not be a good deal for them.  However, if they were thinking of buying an inflation-linked annuity with this spare money, then the State Pension top-up could offer much better value.

September 11, 2016   7 Comments

Ten reasons why investing in a pension fund can be better than investing in property

4 September 2016

1 You get free money from employer – often a matching contribution to double your money No employer help with your property purchase
2 You get extra from tax relief – on top of an employer contribution can more than double your money No tax relief on money you use to buy property
3 No income tax to pay on income earned in a pension fund All rental income taxed
4 No capital gains tax to pay on assets that rise in value in pension fund All capital gains taxed on second property
5 No inheritance tax when passing on pension assets Property assets subject to inheritance tax
6 Inherited pension assets stay tax free until money is taken out Inherited property income will be taxed
7 Costs of buying pension are controlled Costs of buying property can be significant
8 Costs of managing pension usually around 1-2% a year Costs of managing property can be significant – agents’ fee, repairs, empty periods etc.
9 Pensions can invest in property funds and commercial property to spread risk Buying one or two properties has more risk than buying many properties
10 Pensions can also invest in other assets to spread risk Relying only on property is putting all your eggs in one basket


So what is better when saving for your retirement – property or a pension?

Pensions have many advantages:  Pensions allow you to spread the risk and also offer you many other benefits as well.  It seems a real shame that so many people, apparently even those who have the most valuable type of pensions of all, fail to understand how much they are worth.  I would like to explain just how valuable pensions are and why they would normally be the best way to save for retirement – even better than property.

You can more than double your money with a pension:  The first thing to say is that, if you are in a workplace pension and you opt out of it to rely on property, you will lose free money from your employer.  Many employers will match your own pension contributions.  So, if you earn £25,000 a year and you put 8% of your salary into a pension, that amounts to £2,000 each year.  £400 of this, however, will come from basic rate tax relief, so your own actual investment in your pension will be £1,600.  And, if your employer offers a matching 8%, then you have another £2,000 going into your pension fund too.

You put in £1600 and it can become £4000 straight away:  In other words, £1600 of your money has gone into the pension fund and you have received an extra £400 from taxpayers and another £2000 from your employer.  So, on day one, your £1600 is worth £4000.  That is more than double your money.

Even if property prices double and pension investments make no return, you could do better in pensions:  If you pay £1600 a year into a pension you will have £4000 more each year in your fund.  By contrast, if you put that £1600 into a property and even if the property price doubles, you will still only have an investment worth £3200 (and that is ignoring the costs of buying, selling and managing the property).  So even if your pension investments do not perform brilliantly, you will have extra money you would not have had when buying a property.  If your pension fund makes no returns and your property investment doubles in value, you could still be better off in the pension.

Property gains are magnified by borrowing:  The big difference, of course, is that you will usually put more money into a property in the first place and also borrow a huge amount extra with a mortgage.  So, if the price of the property increases, your gains can be magnified because the amount you have invested is much larger.  That works well when property prices rise, but there is no guarantee they will keep on going up and there is also no guarantee that the interest on your borrowings will stay low.

Pension funds can invest in property as well as other assets:  It’s also important to remember that a pension can invest in many different assets —  including property funds and commercial property. So if you think property will do well, you can include property investments in your pension fund but you can also invest in other assets as well.

Don’t put all your eggs in one basket:  When investing for the long-term, it’s not usually sensible to put all your eggs in one basket. Unless you are an expert in one particular area and have ‘exceptional’ knowledge, that you believe is not available to the rest of the market, then relying only on one type of investing means you run huge risks.  A more broadly spread portfolio can reduce these risks for you.  If you already own a home, its value depends on the movement in property prices. If you then buy another property, you are doubling up.  That’s fine when the property market is strong, but there are periods when property doesn’t do well.

Property market may be in a bubble which could burst:  Quite frankly, property does have some of the characteristics of a bubble right now – the housing market has been stoked by the Bank of England pushing down interest rates to encourage people to borrow more cheaply, and there aren’t enough homes being built.  If borrowing is artificially cheap and there is a shortage of supply, then property prices are bound to rise, but this cannot last for ever.

Investing in property is very expensive:  Keep in mind, too, that the costs of buying and managing property can be quite high.  You have to pay stamp duty, and you will usually have solicitor, surveyor and estate agent’s fees too.  If you let the property, your tenants may not look after it, you will have costs of repairs, you may have periods when it is empty and you could even face court fees if your tenants prove difficult.

Pensions are the most tax efficient way to save for the long-term for most people:  You can get tax relief on your pension contributions at your highest marginal rate but you invest in property from taxed income.  Any rental income and capital gains from property are taxed, whereas pension investments are tax free.  Your pension investments pass to the next generation free of inheritance tax and there is no income tax until the money is taken out (and if you die before age 75 there will be no tax to pay at all).  With property, all income and capital gains are taxable and when you pass away your property goes into your estate and is subject to inheritance tax (although there are exemptions for your own private residence).

September 4, 2016   3 Comments

Government must help savers – bring back guaranteed high interest bonds

9 August 2016

  • Monetary policy is not helping ordinary people and low rates may be doing more harm than good
  • Ordinary savers are being hung out to dry and pension problems have worsened
  • Government should issue more high interest 65+ guaranteed growth bonds – but for all age groups

The latest decision by the Bank of England to cut base rate from 0.5% to 0.25%, as well as expanding Quantitative Easing by £60billion, is supposedly designed to boost the economy.  But millions of savers and pensioners are suffering serious potential income shortfalls as a result of this policy.

I believe the damaging side-effects of low interest rates have been under-estimated.  Not only are significant sections of the population being hit near-term, the consequences for the medium and longer term are also negative.

Bring back special savers’ bonds:   As the banks no longer want or need ordinary savers’ money, the Government could offer better interest rates directly.  Bringing back the special savings bonds that were issued from January to May 2015 for the over 65s, but this time for all age groups, would prove popular.  They had market-beating interest rates of 2.5% or 4% and were the most successful financial product for years.  A new issue of such bonds, but not just limited to older savers would reward savers for setting money aside.  This is vital if we are to sustain a savings culture in this country.  Until a few weeks ago, the Bank of England had been suggesting the next move in rates would be upwards – signalling some relief for savers after years of misery.  Now that rates have fallen even further instead, the authorities need to consider the impact on prudent people who want to provide for their own future.  The Government also needs to consider how to help companies that are struggling with rising pension deficits.  Issuing special bonds for pension funds, offering to underpin investments in infrastructure and housing, would be direct ways of helping alleviate the damage of monetary measures.  The Government needs to find ways to offset the negative side-effects of the Bank of England’s latest moves.

What is the damage to savers?  With interest rates staying so low for so long, and rates continually falling further, savings incentives and savers’ incomes across the economy are being destroyed.  This has two damaging consequences which could actually weaken economic growth.

Lower savings income means savers save less and spend less:  Firstly, many people who have saved over the years for their future are facing further income falls.  This may cause them to cut spending, especially if they are in retirement and cannot see a way for their income to increase in future.  Indeed, many savings account interest rates are being reduced by more than the 0.25% rate cut.  Banks and building societies do not need to attract savers now, as the Bank of England’s decision to introduce its new Term Funding Scheme gives the banks cheap money directly from the Bank of England instead.

Destroying saving incentives for younger generations:  Secondly, many people are deciding it is not worth bothering to save as the returns are so tiny.  People who might have saved but decide not to bother will be poorer in future.  Young people are losing the savings culture that the current older generations often grew up with.  Modern societies still need savers, especially as life expectancy increases and the population is aging rapidly.  This lack of savings, and potentially higher borrowing risks damaging growth in future.

What is the damage to pensions?  Again there are two damaging consequences for pensions, both of which are likely to weaken growth.

Rising annuity costs means less pension for life:  Firstly, as interest rates are pushed lower, the costs of buying an annuity have soared.  People looking to lock into a guaranteed lifetime income will be offered much less pension than ever before.  Even if the value of their pension fund has increase a bit, the cost of annuities has usually risen by much more.  And, of course, once they lock into an annuity for life their income will never recover, even if rates rise in future.  So pensioners will have less money to spend, which is hardly an expansionary policy.

Pension deficits weaken company growth prospects and reduce pension contributions for younger workers:  Secondly, employers who are running final salary-type Defined Benefit pension schemes are facing much higher deficits as a result of the expansion of QE.  As gilt yields fall further, employer pension liabilities have soared.  Just today, the Pension Protection Fund PPF7800 index announced that its measure of pension deficits rose last month to around £400billion.  It will rise further this month as a result of the extra QE.  This will weaken the employers sponsoring such pension schemes, damaging their business prospects, potentially preventing them from investing or borrowing to fund growth and sapping corporate resources away from both their business and employment expansion.  As most private sector final salary-type schemes are now closed, the rising deficits are likely to mean employers have less money to spend on providing good pension contributions for those workers who do not belong to these schemes, – usually younger employees.

Monetary policy is too focussed on financial institutions and borrowing:  Monetary policy seems to be overlooking the negative consequences on households (and parts of the corporate sector).

Low rates do not necessarily help mortgage holders and QE has led to rising rental costs:  Typically, if short-term interest rates fall, borrowers’ incomes increase, and they are expected to spend more (or even borrow more to finance extra spending).  However, falling base rates may not help borrowers as much as expected.  Mortgage payments are a major element of household borrowing, but around half of mortgages are on fixed rates, so they do not benefit from the base rate cut to 0.25%.  Indeed, the other element of monetary policy – QE – has damaged especially younger people because it has caused rising property prices.  Ordinary people have to either take out a much larger mortgage to get on the housing ladder, or must pay much more in rent.  So monetary policy has made them worse off.

The Government could help offset damaging impacts of monetary measures:  Because these changes in Bank of England policy have many potentially harmful side-effects, the latest loosening of monetary policy may need to be offset by fiscal measures.   Certainly, the transmission mechanisms of lower interest rates are very indirect – relying on sellers of bonds to boost asset prices or stimulate extra borrowing.  More direct help is likely to have a better outcome.  The indirect stimulus cannot be relied upon to prevent an economic slowdown, while direct measures to increase household incomes and spending, as well as helping offset the effects of rising pension deficits, will be more beneficial to the British people.

August 9, 2016   1 Comment

Pension consequences of QE could undermine policy intent

4 August 2016

  • Further pain for UK pensions as QE worsens deficits and increases annuity costs
  • Bank of England statement completely ignores pension impacts of its policies
  • Estimates suggest deficits now approaching £1trillion – this cannot be sustainable
  • Government needs to consider help for employers

Today’s decision by the Bank of England to cut short-term interest rates and expand the QE programme is another blow for UK pensions.  Both defined benefit and defined contribution pensions have become more expensive as rates keep falling.

Lower rates make pensions more expensive:  The amount of money that is needed to pay promised pensions over future decades depends on how much return one is expected to earn on the money set aside for pensions right now.  The lower the future expected returns, the more money must be put in today.  The cost of pensions, whether Defined Benefit or Defined Contributions, ultimately depends on the returns on gilts.  As gilt yields fall following QE, annuity rates fall and pensions become more expensive.

Rises in asset prices don’t offset rise in the liabilities so pension deficits worsen:  The sensitivity analysis shows that every one percentage point fall in long gilt yields will increase the average pension fund’s liabilities by 20%, while its asset values will only increase by around 7-10%.  Therefore, as gilt yields decline, pension deficits increase and any rise in asset prices is less than the rise in the liabilities or annuity costs.

Deficits are approaching £1trillion:  Hymans Robertson estimated that deficits of UK final salary-type schemes post-Brexit had risen to £935billion.  A further fall in interest rates as a result of today’s Bank of England announcement will see this figure increase further towards the £1trillion mark.  The value of liabilities, as measured at today’s interest rates, is well over £2trillion.

This damaging side-effect of monetary policy means bigger burdens on UK employers:  The consequences of rising deficits are that employers struggling to support these schemes face pressure to put in more money.  The more money they put into the pension scheme, the less they can spend on supporting their operations.  This undermines the aims of QE which is meant to stimulate the economy as this supposedly expansionary policy weakens the ability of the employer to grow its business.  So monetary policy that is meant to boost growth has a damaging side-effect that can undermine companies.  Ultimately, more employers may fail as pension deficits balloon.  That would mean pension scheme members enter the PPF and their benefits are not paid in full.

Trustees caught between a rock and a hard place – need to take more risk, but expected to take less:  Trustees of pension schemes, whose deficits keep rising, are facing almost impossible investment dilemmas.  They are locked into a vicious circle and struggle to break out.  If the scheme deficit has risen, trustees need to consider asking the employer to put more money in to fill the shortfall.  But if the employer has already put huge sums in or cannot afford to do more at the moment, then trustees ideally need to find other ways to reduce the deficit.  This means achieving better investment returns or reducing the benefits (which is not normally allowed under UK pensions law unless the employer is about to go bust).  So trustees would in theory need to take more investment risk, buying assets that can be expected to outperform their liabilities, to reduce the deficit over time.  However, in practice, trustees are usually advised to take less risk, not more risk, if the employer is considered less able to fund the deficit.  They are told to ‘de-risk’ by buying assets that better match their liabilities.

‘De-risking’ becomes a vicious circle that ultimately increases risk of failure:  Trying to ‘de-risk’ generally means buying gilts (or other high quality bonds or hedging), since these are supposed to better match the performance of the schemes’ liabilities.  As liabilities are calculated with reference to gilt yields (conventional actuarial basis) or AA corporate bond yields (accounting measure), gilts and bonds are considered the assets that will best match the liabilities.  But buying more gilts or bonds will, at the margin, force yields down further, especially in light of further QE (buying £50bn of gilts and £10bn of corporate bonds).  Trustees will be competing with the Bank of England for scarce assets and pushing yields even lower and their scheme deficit will keep rising – a classic vicious circle.

Need to outperform liabilities, not just match them and gilts are not a perfect match anyway:  In practice, although gilts and bonds may be a closer proxy for the liabilities than other asset classes, they do not actually match liabilities properly.  There will still be duration and inflation mis-matching, as well as rising longevity, so even buying gilts may not prevent a rising deficit.  And there is a further problem.  If the employer cannot manage to meet the deficit payments, the trustees really need to invest in assets that will outperform the liabilities, not just match them, which means taking more risk, not less.  They seem caught in a trap at the moment.

Index-linked gilt yields are negative so trustees already face deflation:  Pension schemes are facing a further dangerous dilemma in addition to the pure interest rate impact on their liabilities.  Index-linked gilt yields have been negative for some time and the more negative the index-linked yield becomes, the more impossible it is for pension schemes to match their index-linked liabilities over time.  There are no ‘safe’ assets that pension trustees can buy to match their inflation increases.  This further drives them to need to take investment risk.  Indeed, this is what the Bank of England specifically suggests it is expecting, however pension schemes have been unable to do so because they are frightened of the employer position weakening further.


Bank of England seems oblivious to the pension impacts of its policies:  This is what the Bank said today:  “The expansion of the Bank of England’s asset purchase programme for UK government bonds will impart monetary stimulus by lowering the yields on securities that are used to determine the cost of borrowing for households and businesses.  It is also likely to trigger portfolio rebalancing into riskier assets by current holders of government bonds, further enhancing the supply of credit to the broader economy.”  There is no mention of the effects of this policy on pension funds.  In fact, if pension funds are unable to move into riskier assets, the policy is actually going to damage growth in some cases, rather than boost it.  Weakening parts of corporate UK is hardly helping the economy.  Monetary policy is also risking poorer pensioners in future via the impact on annuity costs.  Thankfully, DC pension investors are no longer forced to annuitise too soon if they would rather wait.


Government must address these pension problems urgently:  The Government has given some relief to DC scheme investors with the freedom and choice reforms.  DC savers are no longer effectively forced to buy an annuity if they want to take just a small amount out of their fund.  However, there has been no such relief for employers.  If the Bank of England ignores the effect of monetary policy on pension schemes, Government and the Pensions Regulator need to take the issue more seriously.  So far, very little has been done to address the stress on employers.  I had started some work on this but it did not receive sufficient attention and is even more urgent in light of today’s announcement.


Trustees and employers seem frightened to use flexibilities already built into UK pension system:  The UK pension system does have significant flexibilities which could help employers and trustees cope with difficult circumstances, however there seems to have been a reluctance to use the leeway designed to alleviate these burdens.


Must not just help one favoured scheme:  The problems of Tata Steel and others have highlighted how many big businesses are simply unable to afford paying the full pension promises at current interest rates.  The costs have mushroomed out of all proportion to previous expectations.  The British Steel consultation proposed law changes to allow its trustees to cut members’ benefits without consent and even to make them worse off than going into the PPF itself.  I believe this would be unwise and set a dangerous precedent.  Rather than trying just one favoured employer, the Government needs to look at the whole system.  How can employers and trustees manage their liabilities in the best long-term interests of the both the members and the business in light of QE?  Too much comment seems to focus on the apparent funding levels as measured today, rather than ensuring the strength of the sponsoring employer to back the scheme in future decades.


In danger of making the best the enemy of the good:  Liability management exercises, scheme pooling, longer recovery plans, member consent to benefit changes and benefit streamlining are all possible methods of managing liabilities over time in more affordable ways.  Encouraging members with small entitlements to transfer to DC schemes and facilitating small benefit changes such as a statutory over-ride for schemes that need to change the inflation measure used for uprating could provide much-needed relief for many schemes.  Offering pension schemes favourable terms for investing in infrastructure and social housing projects could also provide some upside for pensions while boosting the economy.  It is time the authorities addressed the serious side effects of monetary policy on UK pensions before more schemes fail.  I was working on these issues but there was no sense of urgency, I hope that the new Government will take this matter more seriously now.

August 4, 2016   2 Comments