The Bank of England is piling up problems for UK pensions and savers

Yesterday Bank of England Chief Economist Andy Haldane took to The Sunday Times to reinforce his views. Presumably he felt that the print equivalent of more Open Mouth Operations would tell us more about what he means by a monetary “sledgehammer”. In it he offered very cold comfort to savers who will be affected by the interest-rate cuts and QE (Quantitative Easing ) he is such a fan boy of.

Understandably, some savers are feeling short-changed. Although I have enormous sympathy for their plight, the decision to ease monetary policy was, for me, not a difficult one.

Actually punishing savers is not a new policy for the Bank of England as Deputy Governor Sir Charlie Bean – just about to arrive at the Office for Budget Responsibility which is ever more breathtakingly described as independent – told savers this back in September 2010.

Savers shouldn’t see themselves as being uniquely hit by this. A lot of people are suffering during this downturn … Savers shouldn’t necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit.”

Sir Charlie then used the forecasting skills he will apply at the OBR to predict better times ahead for savers.

It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.

Actually the swings only go backwards and the roundabouts long stopped spinning. An example of that has happened overnight according to MoneySavingExpert.

Depressing news for savers. Santander 123, the bank account that’s topped savings tables for over four years, will take a hammer to the interest it pays from 1 November. It comes on the back of this month’s base rate cut of 0.25 of a percentage point from 0.5% to 0.25%, but it’s slashing its rate far beyond that, cutting the headline interest from 3% to just 1.5%.

Of course such cuts do not apply to Sir Charlie who has his Bank of England pension linked to the Retail Price Index as well as his salary from the OBR.

Annuities

The issue here is a consequence of the rise in the price of long-term UK Gilts and the consequent fall in yield. Last week Bank of England Governor Calamity Carney sent in his bond buyers in this area but was gamed by the holders and ended up pushing prices much higher than intended. Of course Andy Haldane will consider this to be a success as he explained to Parliament in from June 2013.

Let’s be clear, we have intentionally blown the biggest government bond bubble in history.

The bubble is of course a lot bigger now and is much larger than any West Han fan will be able to blow later. The thirty-year UK Gilt yield is a mere 1.24% so let us review the consequences for annuities which of course depend on such yields. From This Is Money.

A decade ago, a 65-year-old with a £100,000 pot could get £7,092 a year from an annuity, though without any link to inflation…….At the beginning of July, a 65-year-old saver would have been offered just £4,800 for each £100,000 by insurance giant Legal & General……Today it offers £4,462 a year on the same deal — 8 per cent less than a few weeks ago, according to research by annuity expert William Burrows.

The numbers quoted will be lower should annuitants want inflation protection or to provide an income for their spouse.

A clear consequence of this can be seen below. This is from the Association of British Insurers on the first year of pension freedom where the rules on how you take your pension were relaxed.

£4.3 billion has been paid out in 300,000 lump sum payments, with an average payment of £14,500.
£4.2 billion has been invested in 80,000 annuities, with an average fund of £52,500.

We do not know the individual circumstances behind this but I note that money has shifted from being for future consumption ( an annuity) to presumably consumption now ( cold hard cash). Another way of describing this is borrowing from the future. A problem is that annuities pay out for the rest of you life whereas if you take the money and run it may well run out. Please do not misunderstand me annuity rates now are so poor I can understand why people do not take them and I wonder how many of those taking them are getting higher rates due to ill-health.

As the Bank of England blunders into the UK Gilt market I can only see annuities getting less attractive and looking even poorer value.

The Millennial problem

There is a consequence from all of this from younger workers and present and future pension savers as summed up by Bloomberg.

Younger workers will “have to save more — which they appear reluctant to do — or be prepared to work much longer.”

As I have pointed out before such age groups (millennials are 35 and under) have tended to be more affected by the credit crunch in terms of real wages. So they have less money out of which they are expected to pay more whilst in many cases paying off student debt and facing ever higher house prices. That road leads to such phrases as “Generational Theft”

This will not be helped by the Lifetime ISA situation which as recently as the beginning of this month was described like this by City-AM.

A YouGov poll said that 44 per cent of Britons between the age of 18 and 39 would favour using the government’s new lifetime Isa in order to put money aside for older age. Such a decision would put them on a “collision course” with auto-enrolment.

So even then one government policy was clashing with another. Well today the Lifetime ISA concept itself seems to be struggling. From The Financial Times.

The planned launch of a new savings account for under-40s in April is in doubt after providers warned that the government’s failure to provide key details means they will not have enough time to hit the deadline.

The UK pension system has seen far to many ch-ch-changes and these have progressively weakened confidence in the system. A decade ago I passed one of the advanced examinations on the subject only for there to be changes year after year!

Defined Benefit Pensions

On the 9th of this month I pointed out the pensions desert which would suck up the extra £70 billion of Bank of England QE liquidity.

The deficit of defined benefit pensions, which pay out an income linked to an employee’s final salary, jumped £70bn as a direct consequence of the decision to reduce interest rates by 0.25 per cent, according to Hymans Robertson, the consultancy.

We should not be surprised as this as the architect confessed to this only in May.

Yet I confess to not being able to make the remotest sense of pensions. ( Bank of England Chief Economist Andy Haldane).

He and his colleagues are proving it almost daily. Rather like at the Emirates yesterday there is a danger of “You don’t know what you’re doing” being sung.

Comment

We see that as I have pointed out many times before the savings and pensions sector of the UK economy have been targeted by the Bank of England. The  doing “very well” promised by the then Mr.Bean back in September 2010 has not only failed to appear things are getting worse. This makes the economy unbalanced and creates real damage as the corporate sector acts to fill pension deficits and younger workers face have to put ever larger sums of money away. Meanwhile though in an Ivory Tower in Threadneedle Street.

The purpose was to support growth and jobs.

No mention of the inflation target Andy? Oh and even he does not seem to think it will work.

At the same time, no one on the MPC is under any illusion that monetary policy can fully insulate Britain from the long-term effects of the decision to leave the EU.

He looks a rather dangerous gambler who by his own confession is responsible for one of the largest shifts of wealth in history.

Over recent years, there have been fairly rapid rises in UK asset prices — houses, shares and bonds. These have increased measured national wealth by as much as £2.7 trillion since 2009.

Yet apparently the consequences are nothing to do with him and we need ever more. My view on the consequences comes from the Red Hot Chilli Peppers.

Scar tissue that I wish you saw

 

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21 thoughts on “The Bank of England is piling up problems for UK pensions and savers

  1. Pensions are under the radar and many don’t appreciate just how much decline there has been over the last twenty five years. I retired in 2010; if I had retired in 1990 withe the same sum I would have received nearly three times the pension I now receive! If I was retiring now I would receive substantially less. Carney took up the baton from longevity and is on target to complete the demolition job.

    Once this begins to register with the public they will be angry, very angry. I cannot see that most DB schemes will be able to fulfill their pension promises and will have to default to a greater or lesser degree. Philip Green missed a trick in the BHS saga as I think most of the problem there wasn’t Green it was Carney.

    It’s also good to see that the BOE is lining up Brexit as the excuse de choix when the blame game starts for the ongoing economic malaise; blame it on the plebs.

    This will not end well.

    • Hi Bob J

      The decline in annuities that you mention has been driven by the fall in longer-term Gilt yields over my career, something I regularly point out. If we look back to 1996 the 30 year Gilt yield which I quoted at 1.24% in the article was over 8%!

      I agree that scapegoats are being looked for.

  2. Over recent years, there have been fairly rapid rises in UK asset prices — houses, shares and bonds. These have increased measured national wealth by as much as £2.7 trillion since 2009.

    good job National Debt is only 1.64 Trillion ……. ( from about 0.6 T in 2008 )

    seems like the majick money tree to me

    well if you can dump another 375 billion into shares and assets over the next 8 years then we’ll all have 5.4 trillions to pay off the national debt of est 2.6x trillion in 2024 ….

    erm….. I ‘m missing something i think …….

    ( must re-apply to BoE with this calculation on my CV )

    Forbin

  3. my second point is

    “These have increased measured national wealth by as much as £2.7 trillion since 2009.”

    you try and cash that in…….

    • Hi Forbin

      Sadly the Bank of England’s Chief Economist appears unaware that you cannot use marginal prices for average concepts. Well outside of an Ivory Tower anyway! But if you are willing to say how good this is then a career at the Bank of England is your for the taking.

      Brent Crude Oil is continuing its march and is over US $48 per barrel now.

  4. Hi Shaun. On recent observations, I think this issue is starting to get significant media attention. All fuel to the fire of the “intergenerational inequality” political discourse, which I think will get seriously hot once existing DB schemes start folding and it becomes clear the taxpayer will be left with a very big bill.

    As someone in my early thirties (a millennial, I guess), I see decent pension provision requiring a significant percentage of my salary, and I wouldn’t trust a DC scheme in isolation to deliver it (or that the state pension will even exist). Now if everyone starts to think like that…

    • Hi Dannyboy

      Actually people have been questioning the state pension for some time and it has stuck around. But the Triple Lock for the Basic State Pension may accelerate trouble. But yes it locks like both the cherry and the icing on the pension cake have gone for now.

      I too cannot see how DB schemes cam survive any sustained period of Gilt yields like this.

  5. hello shaun,

    does anyone at the top think things through ? Are we ll being dumped into workplace pensions that will on the whole , loose money ?

    the Great Pensions Scandal unfolds as those with pensions pull their pots of gold ( intentional to boost the economy because QE didn’t ) and these workplace schemes that will give back less than 97p in the pound , if not less ?

    All to save the Banks , again ?

    cor, as if anyone in the ivory towers of westminster ever listens ….

    Forbin

    shares in popcorn look good

    oil still not risen yet but 2017 is the year of suprises 😉

  6. Hello Shaun. The looming reality of the pensions crisis has, it seems, yet to register with either the BoE or politicians, but the blame rests squarely with them. DB pensions have been systematically or carelessly (it is hard to know which) destroyed by politicians, all the way from enforced contribution holidays in the 90’s, via reduction then abolition of ACT, to tougher accounting treatment of deficits in corporate accounts in the early 2000’s. ZIRP for the last 8 years compounded the problem and the Bank’s recent actions, if not corrected soon, are likely to result in reductions in pensions already in payment. It really does beggar belief that things have gone so far. As you say, it seems that savers and pensioners have been targeted, presumably from fear of the political fallout from raising interest rates and the effect on house prices. As always the burden falls most heavily on the poorest. There needs to be a re-think initiated at the highest level of Government.

    • Hi Pieter C

      I think it is more careless than systematic. Each time the “hard or soft option” sung about by the Pet Shop Boys comes up then the soft option is taken and cumulatively this builds up. As you point out we are in a crisis now.

      For all Mark Carney’s denials about negative interest-rates there are scenarios ahead where they are looming large.

    • Hi majorfrustration

      The concept of the main clearers having to bid for depositors and savers funds raises a smile.. But sadly the Bank of England would merely add more firepower to its planned Term Funding Scheme to replace it.

      “In addition to its primary monetary policy objective, the TFS will provide participants with a cost effective
      source of funding in the form of central bank reserves to support additional lending to the real economy.
      As set out in this Market Notice, the TFS will allow participants to borrow reserves in exchange for
      eligible collateral during a defined drawdown window.”

      The banks would probably prefer it just like the way Sir Humphrey Appleby preferred the hospital without patients!

  7. There is no question that there is a pension catastrophe brewing but the problem is much bigger ,our economic system is breaking down…..negative interest rates on $13 T of sovereign bonds,unaffordable housing for younger generation,lack of employment opportunity, just debt slavery from cradle to grave.
    If there is a way out of this somebody better work it out soon,NIRP and QE are only postponing the inevitable,like Mr Micawber hoping something will turn up….it won’t.
    The pensions system in the states is already in trouble the Central States Pension fund which is the Pension Fund of the Teamsters Union has announced drastic reductions to its members benefits Jimmy Hoffa will be spinning in his grave,wherever that may be
    Ironically the fund was sucessful when Hoffa and some Sicilian friends were running it before they abruptly terminated the arrangement in 1975
    More recently it was advised by the Goldman Sachs gang sadly its investment advise proved to be much poorer than that of the Sicilian Family business.

    • Hi Private Fraser

      There is a link between taking advice from the Vampire Squid and things going wrong isn’t there? One of the arguments for the US Federal Reserve raising interest-rates is to support businesses with models that reply on a positive interest-rate such as pensions and insurance. So its dithering after only one move has not helped matters.

  8. Yes Shaun,

    There’s no future for savers or any saving financial product there is only debt. I guess we are just a minority of responsible-thinking people on this blog. We’ve seen the inception of debt consumerism at the start of the century and last 8 years have proven just how addictive it can be presented. When you think about the drug of debt it is quite compulsive, who wouldn’t want the latest smart phone for only £50 a month, a £50K motor for only £300 a month and a £500K house for only £750 a month of interest only repayments. That kind of a lifestyle on an average income is really quite bling, instantaneous and “sidesteps” ownership in a world enabled by the Bankocracy.

    I agree with your comment about the trend towards NIRP, there is no avoiding it regardless of the “protests” from the unreliable boyfriend because a drop begets the next drop. The only (perhaps) saviour is a currency failure and there are some twitches shown today, caused (of course) by the referendum which has not been acted upon.

    Keep up your insights.

    Paul

  9. 2 thoughts.
    1) Could it be the case that TPTB don’t actually need the rest of the economy, since all money is created by banks as debt?
    Keep wages low enough so that debt continues to grow; BoE printing for Govt requirements; is that enough to allow infinite can-kicking?

    2) How likely is it that a large proportion of the cash being withdrawn from pension pots is not for intended consumption, now or at any given point, but because of an absolute lack of trust that it WILL be there when needed?

  10. A couple of things caught my eye this morning. The first was the LCP, annual report on the pensions market, which said that by the end of July, the deficit for FTSE100 companies was an estimated £46bn, as against £25bn a year earlier. And this month, the deficit has widened further to £63bn. Congratulations Carney and Haldane

    The second one was this, which explains how cuts in interest rates disproportionately hit pension funds because of the long duration of their liabilities and force them to chase long duration assets (hence the lack of sellers in the BOE auction last week) thus creating a bubble. Again, brilliant work central banks maestros.

    http://www.zerohedge.com/news/2016-08-14/pension-duration

    I can only assume most really don’t understand what BOE policy is doing to them. People were incandescent about what might or might not happen as a result of Brexit but seem totally indifferent to their retirements being destroyed. I presume ignorance is bliss?

    • Hi Ian and welcome to my corner of the web

      I have been a consistent critic of the Bank of England policy to extend the maturities of the Gilts it buys or if you like an “Operation Twist” effort. It has blundered into here an bid up assets that pension funds need as you say.

      The reverse auction for our 2068 Gilt saw prices up to 192 being paid at a yield of 1.15% as Calamity Carney was in full force. I tried to point out the level being insane but instead the media went on about market prices. They did not seem to get that QE and not the markets is responsible.

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