Pensioners hammered by QE and rising living costs
The value of final salary pension schemes has been slashed by £90 billion due to the government’s latest round of quantitative easing (QE), the National Association of Pension Funds (NAPF) warns, while pensioners’ incomes have also been hit by soaring living costs.
A new study by LV= suggest that pensioners’ day-to-day living costs have increased by 33 per cent since 2000.
Matt Trott, LV= head of annuities said: “Low interest rates and rising inflation has hit pensioners hard with the cost of living dramatically rising since 2000, resulting in pensioners having to significantly increase what they spend.”
Meanwhile, QE has reduced the value of annuities, a type of insurance policy which retirees buy with the capital from their pension plan, which then provides them with a regular income.
Today, someone who has £26,000 in their personal pension with which to purchase an annuity, would receive 22% less income than if they had annuitised four years ago.
This means they would receive £440 less income a year.
QE, which the government has used over the past three years to stimulate the economy, has made government bonds more expensive to buy, with lower returns for investors.
This has made it substantially more expensive to fund pensions and led to soaring deficits, with many final-salary schemes closing down.
Joanne Segars, chief executive of the NAPF, said: “Deficits that were already big now look even bigger because of its artificial distortions.
“Firms are legally obliged to fill the deficits, and that diverts money away from jobs and investment, and will lead to further closures of final salary pensions in the private sector,” she warned.
The Bank of England would usually try to boost lending and economic activity by reducing interest rates, but with the base rate at 0.5 per cent for the past three years, this has not been possible, forcing it turn to QE.
NAPF estimates that the first round of QE, launched three years ago, has increased the cost of funding final salary pension schemes by approximately £180 billion.
If QE had not been used, final-salary pension funds might still be in a collective surplus, the organisation claims.
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