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Putting the saver’s case to the Treasury Select Committee, part one
The Treasury Select Committee is conducting an inquiry into Quantitative Easing, particularly the way it has redistributed wealth in the UK. After providing written evidence Simon Rose of Save Our Savers and pensions expert Dr. Ros Altmann were asked to give oral evidence to the Committee. The first part of the session concerned the effects of the Bank’s policies on savings and pensions.
Ros Altmann called QE a “tax on pensions”, pushing down the long-term interest rates which underpin the UK pension system. She expressed concern that the Bank of England had failed to recognise or quantify the side effects of QE which had had a negative impact on the economy and reduced the annuity income of pensioners and the income of companies which had had to put more money into their pension schemes. “My fear is that so far the Bank has simply been in denial that its actions and policies have had these distributional consequences… The Bank is saying its impact on pension funds has been broadly neutral. That does not stand up to scrutiny.”
QE’s impact on pensions
Quantifying this, Dr. Altmann said, “the traditional relationship is that a 1% fall in long-term interest rates would typically lead to a 20% increase in pension liabilities for a pension fund with around a 20-year duration and a 6% to 10% increase in pension assets. So, if those relationships hold, and there is strong evidence that they do, it is automatically evident that pension fund deficits will increase. Notwithstanding the fact the assets may have gone up, liabilities will have gone up more.”
Simon Rose agreed, saying that, “from the savers’ point of view, QE has been an utter disaster, whether people are saving through pension funds or through cash deposits.” The Bank, he said, was obsessed with the rise in the price of assets as a result of QE, but showed little consideration about its policies’ effect upon income. “QE is an inflationary policy, as the Bank admits, and, with inflation currently running higher than the increase in wages, it is not just savers and pensioners but everybody who is suffering… savers are suffering from negative real interest rates and unable to preserve the value of their cash. It is quite an appalling confiscation of wealth.”
The wider effects of QE
Simon challenged the Bank’s belief that QE had boosted the UK economy: “You can print money, you cannot print wealth. You get wealth from creating goods and services. So I don’t feel that QE has benefited the economy as a whole. What it has simply done is redistributed wealth.”
The Bank points out in its document on the distributional effects of QE that 5% of Britons own 40% of the country’s assets. That is not the whole picture, said Simon. He quoted figures from the ONS Wealth and Assets Survey which show that 72% of the country’s net financial assets, as well as private pension wealth, is owned by the wealthiest 20% of households. “So, effectively 80%, the majority of Britons, own only 28% of the assets and they have been losing out to the benefit of the very wealthy. QE is increasing wealth inequality.”
The longer-term effects
Simon was quizzed by MP Teresa Pearce on what the Bank’s policies meant for the culture of saving and whether, “one of the results of QE is to erode the culture of savings, because people have saved and now found that it is not worth anything?” Simon concurred, pointing out that savers often contacted SOS to say that they had done what they thought was the right thing, saving for their old age, but felt that they had been taken for mugs and wishing they had racked up debts instead: “The present generation are feeling betrayed, but I am worried what it means for future savings as well.”
Discussing the efforts of the government to make people save for a pension through auto-enrolment, he pointed out that the Bank’s monetary policy is working against what the Department for Work and Pensions is trying to do.”
Ros Altmann, too, was concerned about the effect on long-term saving. “I do have serious concerns that the prolongation of this period of exceptionally low interest rates at the same time as inflation is overshooting will undermine the willingness and ability of many people to save for their own future, which is an aim of another area of Government policy.
“I would argue that there is this generational divide at the moment whereby monetary policy is putting younger people off saving altogether, because they really don’t see the point. But those coming up to or approaching retirement feel very stuck and are not doing what the Bank of England expected them to do, which is to stop saving and go out and spend more because it is not worth saving.
“Actually, fearing for their financial future, they are increasing their precautionary savings. So what QE and ultra-low interest rates have done is hamper the spending power of the groups in the population who are not over-indebted and who would otherwise spend, because they are worried what is coming next. They are cutting spending.”
The session was a long one, so we shall summarise the comments made on the effects of the Bank’s policies on the economy in a separate blog shortly. If you would like to see an edited video of the session, it is available here, while the full session is available on the Parliament TV website.