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.
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.
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