Jeff Salway: Hard-pressed savers pay a high price for failed lending scheme
OVERLOOK the fact that it’s sent savings returns plunging and done virtually nothing to help first-time buyers, and you could concede that the the Treasury’s Funding for Lending (FLS) scheme has worked.
When it was revealed this week that lending levels hit a three-year high in November, the temptation to declare the FLS an unqualified success proved too strong to resist for some commentators.
But they’re wrong.
There’s no doubt that the cheaper funding provided by the FLS has filtered through to borrowers, with lenders increasingly competitive on rates.
Yet the benefit has been felt almost entirely by remortgagers and buyers with around 40 per cent equity or more.
Very little has trickled down to first-time buyers, making the FLS of distinctly questionable value when it comes to boosting the overall housing market.
In others words, the upside of the much-lauded FLS is limited. The negative impact has been far more emphatic, unfortunately. Savings rates continue to plunge, because lenders taking advantage of the cheaper funding that the FLS provides have less need of deposits from savers. As predicted in this column when the FLS was launched, savers have – yet again – paid the price.
Banks and building societies slashed the interest rates on more than 100 savings accounts in January, compared with just 11 accounts in the same month last year.
It’s a similar story with the other great stimulus with which the government has sought to paper over its disastrous management of the economy.
The extent to which quantitative easing (QE) has harmed pension savers was made clear once again this week.
It was largely responsible for a record increase last year in the number of final salary schemes being closed to new members. Pension funds rely heavily on gilt returns, which have been driven down by the QE gilt-buying policy.
The resultant shortfall is in the region of £90 billion, the National Association of Pension Funds estimates.
Faced with an ever bigger pension funding shortfall, the few firms with final salary schemes still open are having to take action. The worry now is that those still open to existing members will step up their efforts to tempt those emloyees into giving up their gold-plated benefits.
Cash bribes have been banned, but employers are still able to offer enhanced transfer values – increasing the size of the pension being moved – that stack the odds against the employee. Faced with an offer of more money, many people will accept their employer’s offer, yet the chances are that they will be worse off in retirement as a result of giving up their final salary pensions. A lot worse off in some cases.
QE is also hindering the prospects of an economic recovery by forcing companies to spend money on plugging pension black holes, rather than investing it.
The Bank of England continues to insist that QE is worth it, as it helps prevent an even deeper recession. But it wouldn’t be necessary if we weren’t stuck with a government that places ideology above economic needs and principles.
Instead, we’re being led towards a triple dip recession and the very policies designed to shore up the ailing economy will leave millions of people worse off in retirement.
The NAPF’s annual survey including several findings that will alarm investors. The pension funds that invest billions of pounds on behalf of UK pension savers now have greater exposure to fixed interest (including corporate and government bonds) than to equities.
Just 35 per cent of pension fund holdings are in shares, against 39 per cent in fixed interest, the NAPF revealed. It’s the first time since 1975 that pension funds have held more in bonds than shares and compares with a 2007 ratio of 55 to 29 per cent. Less than £10 in every £100 of pension fund cash is being invested in UK equities.
Like millions of private investors, pension funds have missed out on the equity rally of recent weeks because they stayed too long in bonds. And that’s a market with a price bubble perilously close to bursting, some experts believe.
Of course, the shift from equities to bonds is now being reversed, as investors react (belatedly) to the rally by selling out of the latter and into the former. Where else would you buy when prices are at their most expensive and sell when they’re falling in price?
It’s yet more evidence, if needed, that the expensive lessons of the past continue to go unheeded. Pension funds can point to regulatory and other external factors pushing them towards greater exposure to fixed interest assets. Private investors, however, are missing out as a result of misguided caution and, in many cases, a reluctance to seek professional advice.
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