The Bank of England’s “exceptional package of measures” to cushion the UK from recession is not the answer to the UK’s economic woes, warns the chief executive of one of the world’s largest independent financial advisory organisations.
deVere CEO Nigel Green’s warning comes after the Bank’s Governor, Mark Carney, unveiled its biggest stimulus package since the financial crisis, including cutting interest rates to historic lows and expanding its Quantitative Easing (QE) programme.
Mr Green explains: “There are noble aims behind cutting the interest rate and the plans to pump an additional £60bn of electronic cash into the economy to buy government bonds.
“But slashing the rate to historic lows and extending the existing QE initiative to £435bn in total is going to unleash more catastrophic damage on pensions, pension funds and, potentially, the UK’s long-term sustainable economic growth.”
He continues: “Monetary policy alone is not the magic wand to reduce the ills of the economy.
“I suspect that for those firms that are potential borrowers, a cut from 0.5 per cent to 0.25 per cent is pretty insignificant. The reason they are not borrowing is that there are real and justified concerns about domestic and international demand and, as a consequence, there’s little investment incentive.
“A cut in interest rates also actively discourages people from saving at a time when it is clear, and absolutely vital, that we need to promote a savings culture in the UK to tackle a burgeoning pensions crisis and a looming care crisis that could negatively impact not only individuals but the wider economy too.”
Mr Green goes on to say: “The BoE’s raft of measures will, of course, further push down government bond (gilt) yields. Lower yields mean lower pensions as the money paid out from annuities and income drawdown policies falls.
“Anyone recently retired or on the cusp of retirement is at risk of having the retirement income they saved severely eroded by the Bank of England’s policies.
“These falling gilt yields will also further drive up pension deficits. It was widely reported recently that the UK’s pension funding hole has hit a record high of £935 billion. This is expected to soon hit a trillion.
“Unsurprisingly, this enormous black hole will hang heavy over many company pension schemes and in order to survive at all they will need to impose radical changes to the members of their schemes.
“And as these deficits soar, companies running such pension schemes will need to divert more and more money to make up the shortfall instead of using this money to grow their business – again this is bad news for economic growth.”
The deVere CEO concludes: “Slashing incentives for people to save, making millions of pensioners – a critical demographic for the economy – permanently poorer, and further crippling company pension funds can never be the answer to the country’s economic woes.
“A different solution – a more direct way of boosting growth – rather than forcing gilt yields lower, has to be found by the Bank of England.”