Financial News

QE designed to deflate gilts, admits Bank of England

The Bank of England has deliberately deflated the returns on traditional safe retirement investments like gilts to try and persuade savers to put their money in to shares instead.

The aim was to give companies more capital from rising share prices – but the result has been the richest are even richer while pension funds have suffered.

However, the Bank of England argues that while the wealthiest 5% of households in the UK have profited the most, everyone is better off because of quantitative easing (QE).

The bank has pumped £375 billion of government gilts since March 2009 to try and bolster the economy against recession.

Richest 5% hold 40% of wealth

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

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

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

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

“The paper shows that QE also has a broadly neutral impact on a fully funded defined benefit scheme.

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

The bank’s comments have met a mixed response, with financial service providers both backing and attacking QE.

Bank is wrong about pensions

Saga, which supplies financial services to the over 50s claims QE has destroyed the retirement incomes of millions.

The firm’s director-general Ros Altmann said: director general, Ros Altmann, said : “The bank fails to properly address the impact of QE on the 21 million over-50s who have been negatively impacted.

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

“This assertion is simply not correct and the reality is different for those recently or soon-to-be-retired.”

QE is not only reason for low gilt returns

Meanwhile, Tom McPhail, of financial services group Hargreaves Lansdown, said:

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

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

“These annuity market trends include improving life expectancy, increased underwriting and more stringent solvency requirements.”

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