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Right to reply: Why QE isn’t a disaster for pensioners

15 March 2012

2:08 PM

15 March 2012

2:08 PM

The best of all possible worlds for the pension industry is a buoyant
economy. Workers have enough money to save, share prices rise and dividend growth is robust. Interest rates are positive in real terms so annuities are good value. The economy ground to a halt in
2008. The overwhelming priority for everyone is to get growth going again. Without growth the services that pensioners depend on — such as the NHS — will struggle.

Traditionally, governments cut interest rates and raise spending to get the economy moving. The Bank of England has cut interest rates as much as possible and the government deficit remains very
high. We have exhausted conventional policies, and yet the economy is not growing. In these circumstances the Bank of England’s ‘Quantitative Easing’ policies are sensible. There
are few alternatives.


As Fraser has pointed out, QE does lead to big falls in
annuity rates — which appears to be bad news for those who have retired in the last three years. That said, QE has also propped up share prices. The FTSE All Share index has risen 50 per cent
since QE began 3 years ago. Gilt prices have also risen strongly. Let us imagine for simplicity that QE led share prices to double, and annuity rates to halve. In those circumstances newly retired
pensioners are completely unaffected by QE — the value of their portfolio would have doubled, but each £1 of their pension pot would buy them only half as much pension as expected. The
net effect in this example is a wash.

In fact the two effects do not fully cancel each other out. Those about to retire have taken a hit, although one much smaller than anti-QE writers claim. Pensioners are not alone in being made
worse off by the recession — almost everyone has been affected. Some workers, for example, have lost their jobs. Others have seen their hours and wages cut. Yet more have seen their wages
frozen in money terms, meaning a cut in their standard of living.

Saving for a pension means you own part of the British — and other — economies. That is what a funded pension is. A recession reduces the value of those economies. It follows,
inevitably, that a recession cuts the value of any pension pot. QE means that the way that the pension pot has fallen in value is via a fall in annuity values, rather than a fall in the value of
investment assets. But ultimately it is the recession that has hit pensioners, not QE, and ultimately getting out of recession is the news all of us want to hear.

Tim Leunig is Chief Economist at CentreForum think tank.

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Show comments
  • Simon Stephenson.

    Fergus Pickering : 4.24pm

    I was just pointing out that Savers unite’s mindset of “savers=good, consumers=bad” is an anachronism dating from the time when for most people the deferral of consumption into the future involved suffering real hardship in the present. In today’s relative prosperity, not only is saving far less of a hardship in most cases, but as far as the overall economy is concerned, we’ve got too much of it, rather than too little. Saving’s now something that people choose to do as a matter of course, without the need to receive a pat on the back for doing so.

  • Iain

    This is just obfuscation! Most pensioners hold their money in bank accounts, not annuities. They are suffering badly from near-zero interest rates.

  • Fergus Pickering

    I don’t think, Simon Stephenson, you understand the theory of compound interest. Neither do I, but at least I know what I don’t know, Anyway, I’m pretty sure you can’t say what you said. hy don’t we ask someone who DOES know? Is there anyone there?

  • Simon Stephenson.

    Savers unite : 8.30am

    Tell me, why should people who put into a pension scheme, let’s say, 10% of their salary over 40 years of working life – i.e. the equivalent of 4 years’ salary – then expect to be paid a pension equivalent to 66% of their salary for the 20 years of their retirement – i.e. the equivalent of 13 years’ salary? Is this reasonable?

  • Serguei

    QE might be good for pension industry, but it can’t be good for pensioners.
    Pensioner is someone who is already receiving pension, i.e. someone who has already bought an annuity. The annuity payment is already set and it would not go up because share price goes up.
    But the real value of annuity can go down due to inflation. QE leads to inflation.

  • Rhoda Klapp

    While there is no case for the shady deal that is QE, sneaking inflation into the economy by favouribg banls with cheap money to repair their bad positions with no incentive to pass it on, there IS a case dor giving that money, clear or as 0.5% loans, to pensioners. They will not be debt-clearing or paying off the mortgage, they are just cash-poor. They’ll spend it. It will get into the economy. Or they’ll save it in the bank, same effect. What’s that you say? Osborne and King don’t have any cronies who are poor pensioners?

  • Savers unite

    So savers should be glad of having their hard-earned and hard-saved money stolen because it can be used to keep slackers and freeloaders floating along. Floating along, that is, until savers become so impoverished that they are forced to seek low-paid work from (transferred) wealthy slackers and freeloaders. This is the corrupt person’s view of the “circle of life”.

    Yes, savers want a sound economy. In a sound economy, unsound banks would fail, and savers, with sound money, would become the new capitalists for whom erstwhile slackers and freeloaders would finally be forced to do professional, ethical work.

  • Ruby Duck

    The point of the article, surely, is that pensioners would be screwed by the recession, with or without QE.

  • Tim R

    Ah now I see! It was all so easy after all!

    Just print money. How could we not have worked that one out.

    Short of cash – get the presses rolling.

    How clever these smart people are.

  • Edward Sutherland

    Casual observer: you are spot on; couldn’t have put it better myself.What a load of speciousness from Mr Leunig.

  • Chris Morriss

    This article is staggeringly bad. How can this 1st-year 6th-form college economics student stuff ever get passed for publication?

  • Casual Observer

    Meanwhile, back on planet earth, you may have noticed that share prices have not doubled. Also, most people approaching retirement will, if they have been prudent, moved much of their pension pot into cash in order to derisk it, so they would not benefit from rises in share prices. So, in short, what you are saying is complete nonsense.

  • Don Benson

    Massive injections of economic pain killers may make a few people feel good for a while but we all know they won’t cure the disease.

  • horatio

    “… imagine … that QE led share prices to double, and annuity rates to halve. …newly retired pensioners are completely unaffected by QE — the value of their portfolio would have doubled, but each £1 of their pension pot would buy them only half as much pension”

    So, then, we envisage newly-retired people with no cash savings but, calculated pre-QE, portfolios equal in value to their pension pots? This is intended as a realistic illustration of what, precisely?

  • Yam Yam

    Weimar Germany had a name for Quantitative Easing.

    In those days, a lot of purse-makers went out of business; conversely however, suitcase manufacturers apparently did a roaring trade.

  • PayDirt

    For the view of a downunder economist, try:

  • Charlie the Chump

    Absolutely no consideration of the impact of inflation due to QE.

    Poor analysis.

  • Peter From Maidstone

    Simon, it is because truth no longer matters, only ‘balance’ and ‘fairness’, which means expressing two lies and half-truths and hoping the cancel each other out.

  • TomTom

    There will be NO growth again because the so-called growth was debt-fuelled property driven and sucked in imported consumer goods. Growth is now for BRICs and not for Britain which is a Rentier Island

  • Russell

    And still the media queue up to try and justify salaries of hundreds of thousands £’s per year for media execs (managers), CEO’s (managers) and financial Industry ‘managers’.
    What they cannot expl;ain is why these people should get paid hundreds of times more than average pay workers.

  • martin alexander

    Agree with Simon Stephenson..Also at the end of the day QE is simply deferred taxes minus any inflation adjustments..

  • libertarian

    This post tells you everything you need to know about economists. Tim you are deluded and have nil appreciation of the reality based community, you are living in a fantasy world.

  • Simon Stephenson.

    This is a series of half-truths, selected statistics and cherry-picked suppositions that is of no more use than a chocolate teapot to anyone wishing to understand more about QE, its necessity and its implications. It is as though you have been given the task, Mr Leunig, of stating everything good that can possibly be said about QE, but not on any account to mention anything bad about it.

    Why is it not possible anymore for someone with knowledge to present a balanced picture of the pros and cons, instead of feeling the need to act as an advocate for one side or the other?

  • Chris

    Seldom have I been more vividly reminded of George Orwell’s response, in another context, to the claim tnat ‘you can’t make an omelette without breaking eggs.’ ‘Well, where’s the bloody omelette?’

  • Andrew Saint

    And what caused the recession? Principally it was governments spending huge amounts of money they did not have, mainly on negative things like overblown social services departments, the fees of immigration and human rights lawyers, wind turbine subsidies for rich landowners (e.g. David Cameron’s father in law,), “diversity courses” and joke universities (polyversities) and huge subisidies of public sector pensions. These people are the problem, not the solution