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Hammond could be first Chancellor to help families with social care saving incentives

20 November 2016

Hope Chancellor’s Autumn Statement will address
one of biggest social issues of our time

  • Philip Hammond needs to introduce incentives to help people prepare for care
  • Massive failure of political courage by previous Chancellors and a betrayal of British families
  • Britain has been sleepwalking into a social care crisis – it’s time to wake up!
  • Billions set aside for pensions – but virtually nothing to help fund later life care

Let’s have Care ISAs, employer care saving plans, eldercare vouchers

  • Politicians have failed to plan for population aging and rising life expectancy – even though it’s been happening for decades. We’ve had reviews, scandals, exposes, recommendations but still no proper funding plan
  • Care has been left to cash-strapped councils keep who keep cutting provision
  • There has been lots of focus on pensions, but nothing for pre-funding of social care
  • Chancellor should introduce incentives to help families to save for social care, rather than leaving them in the dark about the costs they may face
  • Chancellor could also incentivise employers to help with social care with tax breaks for care saving plans or elder-care vouchers
  • Politicians have adopted the ‘ostrich approach’ burying their heads in the sand and leaving future Governments to deal with the problems caused by today’s lack of action
  • Social care for older people is pushing NHS to breaking point – and that’s before the baby boomers start needing care in coming years
  • The NHS was designed as a make you better service, not a look after you for ever service – it cannot keep picking up the pieces of our broken care system

There’s no magic silver bullet to solve care inadequacies – having been left so long it needs multiple approaches.

Will Philip Hammond be the first Chancellor to introduce tax incentives to help families prepare for care costs in advance? He could show huge political courage by starting to address this enormous crisis. Signalling to families that millions of them will need some money in later life to pay for care needs, not just pensions, should have been done years ago, but successive Governments have failed to offer any help to families to prepare for care. Government spends billions on private pensions tax breaks, and there is a State Pension to provide a base level of support. But there are no incentives to set money aside for care costs. The Autumn Statement could introduce new initiatives giving tax breaks to encourage people to allocate existing or new savings for care. This would help more people recognise the need to keep money back for later life care costs. Currently, they don’t know.

  • Special ISAs for Care Savings: Chancellor could introduce a new type of ISA to help people save for care and could encourage people to switch existing ISAs into Care ISAs. Perhaps up to £50,000 per person which would get an added Government bonus if the money is earmarked specifically for care. The money could perhaps be passed on free of Inheritance Tax to form a Care Savings ISA for the generations if not used.
  • Family Care Savings plans: Baby boomers are now reaching their 60s, but have no idea they may face shocking costs of later life care. Encouraging families to save for care will help explain to families that Government won’t cover most care costs: The NHS is already at breaking point as it picks up the pieces of our broken care system, and that’s before huge numbers of baby boomers, now in their 60s, start needing care in future. Government could offer tax incentives for ‘family care savings plans’.
  • Tax incentives to keep some money in pensions, such as tax free withdrawals for care: Many baby-boomers have money in their pension funds and now have more freedom to leave their money invested, rather than buying an annuity. The Chancellor could allow tax-free withdrawals from pension funds if the money is spent on care.
  • Tax incentives to encourage employers to help staff save for later life care: A pension is not the only money you may need in retirement. Encouraging employers to contribute to a care savings plan for their staff, with similar tax breaks to pensions, could help people build up funds for later life care.
  • ‘Eldercare’ vouchers to help staff with care costs: Employers could offer elder care vouchers (along the lines of childcare vouchers) which get tax relief as an employee benefit.
  • Stamp duty breaks when older people downsize their home: Government could help ‘last time buyers’ downsize their home. Perhaps with a one-time stamp duty exemption on last home purchase. This could free up some money that could be spent on care in future years.

10 failings of social care:

  1. No financial or tax incentives to help families prepare for care costs in advance: There are significant incentives to help people build up private pensions, but no Government incentives for care savings. There is employer help for pensions and also the state pension to provide a base, but there is nothing for later life care needs.
  2. Triple cutbacks in publicly funded care is betrayal of British families – It is estimated that 150,000 fewer people are receiving help at home than five years ago as councils impose triple cutbacks: (a) only paying for those whose care needs are already substantial; (b) cutting the amount of care provided per person (such as 15 minute visits); (c) failing to pay the full costs.
  3. Health lottery – depending on what’s wrong with you, taxpayers may pay all your costs via the NHS, or none if your care needs come under council control. Most people assume the NHS looks after elderly people but they are often left to pay for care themselves.
  4. Postcode lottery – Many councils are cutting back care spending, leaving care homes or domiciliary care companies unable to cover their costs.
  5. Social care is the meanest of all means tests, and families with savings face a double hit – councils will only pay for care if people have less than £23,250. This could include the value of their house, unless they or their partner is still living there. While those with no assets get care costs covered by council taxpayers those people who have to pay for their own care are hit twice. Councils are not paying enough to cover the costs of care for those who do get public funding, so those who get no public money must not only cover their own cost, they also have to pay extra for other people’s care too, to make up for council underfunding.
  6. Government hasn’t told the public about the need to prepare for care costs – Government has tried to pretend it is sorting out the problem when in fact the crisis is getting worse. Families are being left to find funds when needs suddenly arise rather than having to prepare for care in advance. Political spin is does not help those in dire need.
  7. Lack of cross-Departmental approach – addressing the care crisis will require several Government Departments to work together – Department of Health, DCLG, Treasury and Housing. The NHS should work with DCLG to properly integrate funding for health and care needs of rising numbers of older people. Treasury must urgently introduce incentives to help families save for care. Housing Ministers must ensure building of suitable homes for ‘last time buyers’ to downsize to. If people stay in unsuitable homes, rather than being able to move to good quality, smaller, user-friendly housing, they are more likely to need social care.
  8. Lack of integration between health and social care services leaves the NHS paying for those who develop health needs due to lack of care – In Torbay and South Devon, the integration of health and social care has seen emergency hospital admissions for the over-65s almost eliminated. But in most other areas, failure to fund social care, often results in older people ending in the NHS – the most expensive care setting.
  9. No incentives for councils to save money to NHS – The current system actually incentivises councils to push extra costs onto the NHS. The longer councils can delay hospital discharge, the less they will have to pay for an elderly person’s care. This ends up costing the taxpayer far more, as well as being worse for older people. This failure is leaving NHS resources stretched to breaking point, a lose-lose situation for us all.

No incentives for NHS to save money to councils e.g. GPs could help patients by recommending preventative measures –currently GPs are not incentivised to prevent care needs, rather than waiting to treat them after problems arise. It could save money and improve people’s lives if GPs could recommend personal alarms, handrails or a bit of home care.

November 20, 2016   2 Comments

Great news on Chancellor banning cold calling and protecting pensions better

19 November 2016

  • Treasury set to ban pension cold calling in Autumn Statement
  • Well done Philip Hammond – this is a great start to help clamp down on scams
  • Clear signal for people that such calls are illegal so they should Just Hang Up or delete email
  • Further measures to stop scam schemes setting up and clamp down on transfers also welcome
  • We must do all we can to protect people’s precious pension savings and this is a positive step


The Chancellor is going to announce that pension cold calling is to be made illegal.  He may also be announcing additional measures to help protect customers, by making it harder to set up scam schemes and to transfer money into them.

Well done Philip Hammond – we have to do whatever we can to protect the public against fraudsters.  Vulnerable elderly people are being called and offered free ‘pension reviews’ which lead to them losing their entire life savings.  We need to be able to give the clear message that if someone contacts you out of the blue about your pension, they are breaking the law, they are criminals.  By making cold calling illegal, it is much clearer for the public that they just should not engage with such people.

So far, the government has tried a number of initiatives, such as Project Bloom, Project Scorpion, Action Fraud and cross-Departmental taskforces that aimed to warn the public and catch the fraudsters.  Unfortunately, the Government admitted in response to Written Parliamentary Questions that nobody has been convicted and only a handful have even been charged.  The current indirect approaches are very well-meaning, but just don’t work for the people who need protecting.

A ban on cold calling is obviously not going to stop all scams, but it gives people a fighting chance of recognising the dangers before they engage and also ensures that we can give the public the clear message that such approaches are dangerous and should be avoided at all costs.

Ideally we would want to find ways to stop pension firms transferring people’s pensions into scam schemes, however that is far more difficult.  A ban on cold-calling is something that can be done more quickly.

I worked hard as Minister to try to achieve this and am delighted to see it looks as if this will finally happen.  Officials and other Ministers tried to caution against banning cold calls because they did not want to stop bona fide businesses being able to contact customers.  That argument is false.  No bona fide company should contact people out of the blue offering free pension reviews or investment schemes for their pension savings.  If a firm wants to generate new customers, they will have to find better ways than just buying up lists of contact details and cold calling people.

A number of advisers have set up a petition which has helped to focus attention on this issue and the media has been great in supporting the ban on cold-calling.

A victory for common sense and for customer protection. Well done to all.

November 19, 2016   1 Comment

Chancellor should think again on Lifetime ISA before the next mis-selling scandal happens

14 November 2016


  • Providers beware – don’t sell this product carelessly, it could come back to bite you!
  • FCA rules should require advice, suitability checks and risk warnings before providers sell this
  • Pensions are best for retirement saving – right behavioural incentives to keep money for old age
  • Lifetime ISA could snatch defeat from the jaws of victory as pension coverage rises
  • Lifetime ISA won’t last a lifetime – and may confuse younger people into opting out of pensions
  • Greater risk of later life poverty for today’s younger generations who spend all LISA at 60

I am calling on the providers to wake up to the risks of selling Lifetime ISAs to people who would be much better off using pensions for their retirement savings.  I hope that the Chancellor will recognise these risks and make changes in the Autumn Statement.  We should not confuse people about the best way to save for retirement – pensions are unquestionably the best for the vast majority of people.  If the Treasury does not understand the risks, then I hope the FCA will clamp down on how these products are sold, to make sure there must be careful suitability checks and risk warnings before people lock money into the LISA, thinking this is an appropriate way to save for retirement.

I list here twelve reasons why Lifetime ISAs are a bad idea for retirement saving

  1. LISAs likely to be new mis-selling scandal waiting to happen – not simple products, need proper risk warnings and suitability checks:  LISA must not be sold carelessly.  The FCA and providers should recognise need for proper risk warnings and adequate suitability checks.  Without proper safeguards for consumers, this is a major new mis-selling scandal waiting to happen, when workers wake up to the fact that they are much worse off than they would have been in a workplace pension scheme.  Will they complain to their provider or their employer?  We don’t know, but it is clear that those who opt out of workplace pensions, or give up an employer pension contribution or lose out on higher rate tax relief will be worse off with a LISA than a pension.  Even those who don’t give up an employer contribution could be worse off.  If this product is sold carelessly and they don’t realise this, they will have valid reasons to complain in coming years.
  2. People likely to have less money in retirement as a result of the Lifetime ISA: LISA will see lower contributions going in, lower investment returns, some withdrawals along the way.  The amounts of money going into LISA will be lower than if workers put the same amount into a pension.  This is because at best they only get the equivalent of basic rate tax relief, they will not have an employer contribution, they will lose any National Insurance relief or higher rate tax relief they could get on pension contributions, more is likely to be saved in cash giving lower long-term returns, charges may be higher than pensions as there are no controls on the Lifetime ISA charges and they may spend the whole lot at age 60.
  3. Snatching defeat from jaws of victory as Lifetime ISAs will confuse workers about how best to save for retirement:   As auto-enrolment is bringing millions more people into pension saving, and opt out rates are low, it is clear that workers have welcomed being put into pensions by their employer.  This is a real success story, but we may be about to snatch defeat from the jaws of pensions victory.  If people hear about Lifetime ISAs and don’t understand the benefits of pensions, they may be tempted into opting out of a workplace pension and using a LISA instead.  This will leave workers worse off in later life and at much greater risk of poverty in old age than if they saved in a pension.
  4. Lifetime ISAs will not last a Lifetime – behavioural incentive is to spend all money at age 60: The LISA has major incentive to spend the entire pot around age 60, which means having nothing left in your 80s. This is not a sensible retirement saving structure!  The point of retirement saving is surely to make sure future pensioners in decades to come will have money to live on, in excess of just state benefits, when they reach much later life.  A pension incentivises people not to spend the money too soon, since pension freedoms mean they will pay large amounts of tax if they take too much out, whereas it can pass on tax free now that the 55% death tax charge has been abolished.  Incentivising spending the money too soon is classic irresponsible pension policymaking, leaving future Governments to clear up mess created by today’s policies.
  5. Lifetime ISAs cost today’s taxpayers billions of pounds while still leaving a future Government to deal with millions of poor pensioners who spent it all too soon: Today’s taxpayer subsidy is forecast to cost billions of pounds, but this public money will be wasted if future 60-somethings just spend the whole lot as soon as they can because it’s tax free and because they fear a future Government will tax the money.  Giving taxpayer help for house purchase is fine, but let’s focus the retirement saving help on pensions, rather than confusing people with a new inferior product.
  6. Less money will go into LISAs than pensions:  Upfront tax incentives for LISA are no better, and will generally be much worse than for pensions.  Partly because the 25% is only the same as basic rate tax relief, partly because there is no employer contribution, partly because people will lose any National Insurance relief and of course people may not trust a future Government to keep the money tax free and therefore contribute less.
  7. Less money will build up over time than with pensions:  Lifetime ISAs will see less money building up in long-term savings than would be the case with pensions.  This is because there is no employer contribution, there is no higher rate relief (the 25% is the same as basic rate relief which is the minimum available to pension savers), partly because more will be held in cash and partly because some people will have taken money out along the way.
  8. 5% penalty on Lifetime ISA withdrawals will drain people’s resources: The 5% penalty on withdrawals is draconian – especially as we are about to cap exit penalties on pensions at 1%!  We have seen with 401Ks that many people simply take money out because they can and therefore less is left for later life.  A retirement saving product is best left alone till retirement, and ideally needs to last until your 80s or 90s.  Pensions are far better for this than ISAs.
  9. Pensions are more likely to last a lifetime than Lifetime ISAs. With no inheritance tax to pay on money passed on from the pension, and no 55% death tax charge, it is safe to keep the money for later life.  However, with an ISA, people will want to spend the money sooner while it is tax-free and there is no ‘brake’ on spending it too quickly.
  10. Lifetime ISA could help first time buyers, but we already have HelpToBuy ISA so why confuse ISAs with another product?  Those saving to buy their first home can benefit from using a LISA, but there is already a Help To Buy ISA for that purpose. We do not need to confuse the ISA brand with yet another product – it is better for people to keep this simple and separate.
  11. Lifetime ISA will be great for wealthy people – but are they the ones who need further taxpayer subsidy?: Many people wanting to buy Lifetime ISAs will already have filled their full £40,000 annual allowance, or Lifetime Allowance.  Some IFAs have wealthy clients who are eager to take advantage of the generous taxpayer subsidies as another tax-incentivised savings vehicle for their children or grandchildren.  But is this a sensible use of taxpayer subsidy?  Those who most need retirement savings will normally be better off using pensions – do not need another product to confuse people, or cost more taxpayer resource.
  12. Most ISAs are held in cash with lower long-term returns but no controls on charges: Cash savings can be fine if you’re saving for a house or other defined nearer term goal, but for retirement saving the best investments are longer-term investments that have better growth potential and should give more money for pensions in later life.  People may end up with relatively high charges for this complicated product while saving in cash.

November 14, 2016   1 Comment

Triple lock state pensions

6 November 2016

State Pension should move to a double lock from 2020 – 2.5% guaranteed rises make no sense

  • Triple lock was introduced for political reasons but 2.5% inflates long-term costs
  •  Double lock can protect pensioners properly against rises in earnings or prices
  •  Must not increase means-testing of State Pension as that would undermine private saving

The State Pension triple lock is promised until 2020 – after that, the law only requires earnings increases. However, because the triple lock is currently in place, promising to increase parts of the state pension by the best of rises in prices, earnings, or 2.5%, the OBR official long-term forecasts for state pensions spending assume the triple lock remains in place for ever. This adds hugely to forecast costs.

Triple lock has been used by politicians and Government to cover up pension policy failures: I discovered, as Pensions Minister, that when people raised problems about any aspect of pensions policy, the official reply was that the Government had the triple lock. That was supposed to be the catch-all phrase that proved the Government was unquestionably looking after pensioners properly.

In fact triple lock only applies to selected parts of the State Pension, not all of it: The triple lock has, of course, done a good job in many ways, but it applies only to the basic and new State Pension levels, and not to other pensions and pensioner benefits. State Second Pension, Earnings Related State Pension, disability, war veterans and widows benefits, carers’ benefits are all only linked to prices. In fact, these pensions were frozen last year and had no rises at all. Pension credit is only linked to earnings (although the Government has in fact increased it by more than earnings in most years recently).

We must protect pensioners but also consider inter-generational fairness: My position is that we must protect pensioner incomes. The triple lock has fulfilled a useful purpose in boosting the level of the state pension, but a double lock for the long-term would offer pensioners proper ongoing protection, better than earnings or prices alone, without the commitment to a 2.5% figure that is unrelated to the economy or society. Government needs to consider inter-generational fairness and long-term costs.

2.5% is an arbitrary number: The triple lock itself is really a political construct. The 2.5% makes no economic or social sense. If Government believes the state pension should be brought up to a higher level, then it can consider each year how much extra to increase it beyond prices or earnings, but without committing to an arbitrary number.

As Pensions Minister I suggested a double lock from 2020 onwards: Last year, as Pensions Minister, I proposed that Government should commit to moving to a double lock after 2020. Currently, the law only requires rises in line with earnings, but using a ‘double lock’ would ensure the state pension rises in line with either earnings or prices each year, to protect pensioners against future rises in prices or national earnings levels.

Double lock protects pensions relative to the economy and society, better than just earnings: A double lock would guarantee state pensions would not fall behind the cost of living or the rise in average earnings, and would protect pensioners relative the rest of the economy and society. This would give pensioners better protection than other groups, which is right, but it would not ‘bake in’ the 2.5% figure that is not related to any economic or societal yardstick.

Nothing to stop a future Government giving more than 2.5% or more year by year: The double lock does not preclude higher rises if the Government of the day wants to offer more in any particular future year. But those rises can be decided at the time, rather than committing to an arbitrary number that has no relation to the economy or society.

Double lock helps reduce long-term forecast cost of state pension in national accounts: For the purposes of forecasting long-term state pension costs, the triple lock apparently must be assumed to stay in place until there is an announced policy change. The Office for Budget Responsibility (OBR), therefore uses the triple lock for its forecasts, even though legally state pension increases revert to earnings from 2020. A double lock would help take some pressure off the need to increase the state pension age as much as might otherwise be the case because the forecast rise in state pension costs would be lower than if we assume the triple lock stays in place in perpetuity.

Keeping the 2.5% in long-term forecasts could double expected state pension costs: A Report produced by the Government Actuary’s Department (GAD) last year (published but then hastily withdrawn one day later) suggested that the cost of the triple lock has been about £6bn a year. The GAD Report also said the cost of the triple lock could well be ‘materially higher’ in future, especially if earnings and price inflation stay low for a longer time. On its most likely scenarios, keeping the triple lock could add around 10% to spending on state pensions by 2040, but in a deflationary scenario the triple lock could more than double the cost of just linking to earnings by 2070.

Since 2010, pensioner incomes have been boosted significantly: Leaving pensioners in poverty is unacceptable, yet until a few years ago that was the fate of too many or our country’s elderly people. In 2008, the Basic State Pension had sunk to the lowest level relative to average earnings for decades. However, since 2010 the incomes of the UK’s 13 million pensioners are now more than £10 a week higher than they would have been if the state pension had only been linked to average earnings. Recent figures on Households Below Average Income, released in June 2016 show that the percentage of pensioner households living in poverty has fallen from just under 30% in 2002/03, to 13% in 2014/15. Pensioners are at lower risk of living in both relative and absolute low income after housing costs than the overall UK population – see page 10 of the Report:

Government must not listen to calls to increase means-testing – it has to be safe to build private savings: The vast majority of pensioners are not well-off. The majority do not have high incomes and the State Pension itself is low – even the new State Pension is only around £8,000 a year. Indeed, the state pension is being reduced for future generations. It is therefore vital that people have private savings as well, or they will have relatively little to live on for the rest of their lives. Having just introduced the new flat-rate state pension, with the state providing just a basic level of income and encouraging people to save privately on top, more pensioner means-testing would be disastrous. It may sounds appealing to say that more help should be given to the poorest pensioners, but that is really saying that those who have saved for their future should be penalised. The long-term result of such policies will ensure more future pensioners will be poor, whereas we need a system in which saving for retirement is the right thing to do. A fair, basic state pension and encouragement of private saving is the best way to manage state pensions for the long-term. Moving to a double lock would help set a stable and fairer base for the long-term too.

November 6, 2016   Leave a comment

BHS Pension Scheme

3 November 2016


  • Pensions Regulator is right to pursue BHS owners on behalf of pension members
  • You don’t tell the Regulator what you think is the right amount, the Regulator tells you!

Two important BHS questions have not been answered:

  1. Why did Sir Philip not get Clearance before selling BHS?
  2. How did both he and Dominic Chappell believe the half billion pound pension debt was going to be met?

I am pleased to see the Pensions Regulator pursuing the former owners of BHS on behalf of the Pension Scheme members.  If the Regulator believes that the pension scheme was not adequately supported, then it must go after those responsible to recover more money.

They should have obtained Clearance before the BHS sale and should have had a proper plan for fixing the deficit:  There are two vital questions that lie at the heart of this sorry saga.  Firstly, why did Sir Philip not get Clearance from the Pensions Regulator before selling BHS?  Secondly, how did he and Dominic Chappell believe the company was going to pay more than half a billion pounds of pension debt to cover BHS workers’ pensions?

If Sir Philip had obtained Clearance, he could have avoided these problems:  We have an established process for companies that want to sell businesses with large pension deficits.  You go to the Regulator, you will be asked to provide information and evidence to show the funding of the pension scheme and how you have supported it in the past, and then the Regulator will assess the situation and tell you how much you need to pay in order to meet your responsibilities.  Sir Philip originally applied for this Clearance but never went through with the process.  It is not clear why.  Did he not want to provide all the information asked of him?  If so, he has now had to provide it anyway.  Did he decide to just take a gamble and hope he could avoid further payments?  If that was the case, he lost and should now pay up.  In any case, it would be entirely wrong to try to avoid proper responsibility for the pension promises made to BHS workers.

You don’t tell Regulators what you believe is the right amount – they tell you! When I was Pensions Minister, he approached me to try to help him with his pension problems.  I refused.  He did not seem to understand how the Regulatory system works.  The impression I had was that he believed it was up to him to tell the Pensions Regulator how much he was willing to pay, rather than him asking the Regulator to let him know what was the right amount.  It seemed he may have believed she was being unreasonable but it is simply not up to him to decide this.  The Regulator is the body established to protect our pension system and ensure employers cannot just walk away from their pension obligations.

If he had obtained Clearance it could have cost far less than he will now have to pay:  This established mechanism of obtaining Clearance before selling a company with a large pension deficit has been used by many businesses in the past.  It allows the Regulator to investigate the pension situation before the business is sold, assess how the owner has supported it up till now, and then decide how much more, if anything, needs to be paid in for the owner to have met its reasonable responsibilities.  But in order to do this, the Regulator demands financial information about the past history of the business.

There seems to have been no serious planning by the owners of BHS for fixing the pension deficit properly:  The second vital question that remains a mystery is how on earth Sir Philip and Dominic Chappell actually believed this company, with more than half a billion pounds worth of pension deficit, could meet those liabilities.  Where was the money going to come from?  The workers of BHS had worked loyally for Sir Philip for years, had trusted his pension promises and were relying on him – and any new owner- to ensure their pensions would be paid.  Sadly, the owners do not seem to have taken these obligations as seriously as the workers and the Regulator would expect.

The BHS sale documents say the business was being sold ‘debt free’.  Does this suggest the owners somehow believed pension debt is not real? When the Work and Pensions Select Committee investigated the BHS pension situation, it uncovered documents that described the sale of the business for £1 as being ‘debt free’.  It was as if the hundreds of millions of pounds of pension debt somehow didn’t count!  It is now clear that this debt is real and the Regulator is right to ensure that both BHS owners and all other sponsors of company pension schemes understand that they cannot just walk away from pension promises.  They have to co-operate with the Pensions Regulator and then pay what is considered a fair sum into the scheme.

Sir Philip said he would ‘sort’ the pension situation – he now needs to put up enough money to do so:   I do believe that Sir Philip meant what he said to the Work and Pensions Select Committee and that he wants to deal with the pension debt.  However, this is going to cost him a significant sum – and will be likely to cost far more than if he had obtained Clearance in the first place before he sold BHS.  He knows that if he just puts in a small sum, the money will not improve the pensions of his former workers.  He has to put in enough money to satisfy the Pensions Regulator that the scheme can pay more than PPF benefits.


Paying more than PPF benefits will cost hundreds of millions – but paying less than this will mean members stay in the PPF and the money just goes to the PPF pot:  If I were Sir Philip, I would take back responsibility for the BHS scheme and manage it on an ongoing basis to find the best way to meet the liabilities over time.  But that will be expensive.  This is what he promised Parliament he would do.  Putting in a smaller amount than the Regulator requires will just mean members stay in the PPF and any extra money goes into the central PPF pot.  To pay better benefits will require a bigger amount of money, but it is up to the Regulator to decide what that amount should be.

Get Real Sir Philip – you should have obtained Clearance and, having not done so, you have ended up with a full-blown Regulatory inquiry and huge reputational damage.  The Regulator will now tell you how much you have to pay – it is not up to you, just get on with it.


This document was released by the Work and Pensions Select Committee and suggests the BHS pension scheme seems not to have been considered a ‘debt’ in the negotiations to sell the business.  This document skirts over the pension issue as if it hardly exists.

The sale of the business is called ‘debt free’ even though it actually had a £500m debt owed to the pension scheme, i.e. staff, former staff and pensioners!  For example, Para 4. states Arcadia Group will ‘deliver the BHS Group on a debt free basis’.  Para 13 also says ‘BHS will be debt free on completion’ – again suggesting pension debt is not considered real debt.

The document merely suggests that this could be taken care of with the help of Arcadia paying £5m a year to the trustees.  Para 7 states that Arcadia Group will make annual contributions ‘for each of the next three years’ of £5m pa to the pension scheme.  The three year period is intriguing.  What provision was made for meeting the balance of half a billion pounds of liabilities to the pension scheme members?

Indeed, even this £5m a year contribution is caveated in Para 8. which interestingly mentions that Arcadia would not even put that money in if the new owners make an agreement with the trustees that could reduce liabilities.  It requires the new owner to ‘use its reasonable endeavours to reach a settlement, as soon as reasonably practicable, with the pension scheme trustees … following a favourable change in interest rates for instance.’  This suggests Arcadia believed rising interest rates would allow all to be resolved.

There is an intriguing bullet point in Para 16 too.  The final point is that there will be agreement from the pension trustees.  It says that completion of the deal will be conditional on Arcadia and the purchaser ‘receiving any benefit of any tax or pensions clearances that they feel are necessary prior to completion’ but in the end they did not get Clearance for the pension scheme.  Did they consider it was not necessary before completion?  If that is the case, why?

November 3, 2016   Leave a comment

Pension Scams

31 October 2016

Nobody likes to hear about pensioners being mugged, or robbed of their life savings.  Unfortunately, thousands of older people have suffered such indignity at the hands of pension scammers.  It is time the Government took this issue seriously.  There are no easy answers, but a ban on cold-calling would certainly help.

Most pension scams start with a cold call, someone phoning or emailing out of the blue, offering a free ‘pension review’ or an exciting investment opportunity that is too good to miss.  Soon after that you can find your life savings are gone, and you may even have a large tax bill to pay too.  Thousands of people’s lives have been ruined by such scams.

That is why it is so important for the Government to do whatever it can to clamp down on the fraudsters.  In the past few years, thousands of pension scam schemes have been reported but no convictions have resulted.  It can take years to investigate these incidents, and of course once a scheme is discovered it is usually too late – the pensioners’ money is gone.

We must do more to protect the public and make it much harder for the scammers.  As cold calls are such a common way of beginning the scam, let’s make them illegal.  After all, if we can ban cold calling for mortgages, why not extend this to pension ‘reviews’ and investments.

Of course this won’t stop all scams.  Yes, ideally we should also stop pension companies from transferring money into these scam schemes, but that is harder and at least banning the initial cold call is a start.  It would make scams harder and, perhaps most importantly, would send a strong message to the public that such cold calls are dangerous.

It could also be more effective in securing convictions.  Proving fraudsters have broken the law by cold calling is pretty straightforward, but convicting someone for a pension scam is impossible in advance – the authorities must wait until the investment has collapsed.  By then people’s money has gone so it is too late to actually help.  We must do more to prevent the problem, rather than sweep up afterwards.

When I was Pensions Minister, I wanted to do this, but my advice was that making such cold-calling illegal would be difficult – and would not work.  I pushed back but officials were always adamant.

Numerous reasons were suggested.  I was told the Government does not want to stop bona fide businesses from cold calling people and would prefer to focus only on the fraudsters.  This is unacceptable.  Reputable companies should not call you out of the blue about your pension.  Firms will have to find better ways to gather clients than cold-calling.

I was advised that most scams originate overseas so a ban would not be effective.  In fact, the Government does not actually know where scams start and some calls definitely come from the UK.

I was also told we would introduce ‘Caller Line Identification’ so people could track where the calls had come from, but that does not address the problem.  We have the Regulator, the Police, the FCA and other agencies all working together to try to address this and also to catch those who are responsible wherever that is possible, but so far to almost no effect.

So let’s just get on with banning these cold calls and give people a fighting chance to fight back.  Send a clear message to the public that someone who tries to contact you out of the blue about your pension will be acting illegally and, if you do get such a call ‘Just Hang Up’.

October 31, 2016   1 Comment

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   5 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