Market view: QE will hit pension pots

The Bank of England today announced a fresh £50bn in quantitative easing, bringing the total to £325bn as the Bank continues to combat inflation in the UK.

Commentators have voiced concerns that while this may ameliorate problems in the short-term, it will spell difficulty for workers looking to retire.

David Miller, partner at Cheviot Asset Management, pointed out that the BoE now owns almost a third of all UK gilts, approximately equal to the GDP of Switzerland or Norway.

He said: “Numbers this big show that the MPC is doing everything it can to stimulate growth and prevent the UK heading into a Japanese-style lost decade.

“We shouldn’t forget that this is a massive monetary experiment by the Bank, we’re only midway through and no-one is sure of the outcome.”

Joanne Segars, chief executive of the National Association of Pension Funds, argued that although the additional quantitative easing could have a short-term benefit, it will cost retirees heavily in the long-term.

She said: “People who are retiring now are finding that annuity rates have been squashed by QE, and that they will get a smaller pension than they expected.

“Retirees who got locked into a weak annuity will find that the Bank’s money printing leaves them out of pocket for the rest of their lives.”

She added that for companies running the ever-rarer final salary pension schemes, QE will push their pension funds further into the red.

“This means businesses have to put money into their pension schemes, instead of spending it on jobs and investment. Our fear is that firms struggling with a weak economy will simply choose to close their pension schemes.”

Over on the mortgage side, Building Societies Association director-general Adrian Coles expressed concerns that although the additional QE was a predictable development, it may not do enough to support the market.

He said: “It remains to be seen whether this will stimulate demand, economic growth, and market confidence.

“Further quantitative easing may help to ease conditions in the mortgage market. However, demand is currently subdued particularly as a result of low consumer confidence.”

Simon Ward, chief economist at Henderson, predicts the BoE will continue to overshoot its inflation targets regardless of the new QE bout.

He said: “The Bank’s inflation forecasts have been persistently much too optimistic since the middle of the last decade, with no evidence that this bias is lessening, despite expenditure of £2.8m on upgrading its economic models.

According to Mr Ward, the BoE’s forecast of a consumer price index rate of under two per cent by the end of 2012 relies on a slowing of core inflation and drops in energy and food prices, neither of which he believes is probable.