IMF’s growth remedy another bitter pill for struggling savers

For pension savers, the implications of the International Monetary Fund’s proposed remedies for the UK’s economic woes could not be much worse.

For pension savers, the implications of the International Monetary Fund’s proposed remedies for the UK’s economic woes could not be much worse.

For all the coalition government’s claims that IMF head Christine Lagarde had endorsed its deficit-reduction policies earlier this week, her ultimate message was that the Chancellor needs to figure out a Plan B – and fast.

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Given he has so far shown very little inclination to stray from a path conspicuous by its absence of growth policies, there’s more chance of rapper Plan B replacing Mervyn King at the Bank of England.

And that is desperately bad news for pension savers, particularly those nearing retirement. Lagarde suggested that unless there’s an unlikely upturn in fortunes, the UK will need to look at cutting interest rates and boosting its quantitative easing (QE) programme.

That’ll be the QE that has achieved nothing except rob millions of people of invaluable pension savings. If the government does decide that QE is the only answer – one that in 2009 was described by George Osborne as “the last resort of desperate governments” – it must consider how it affects pensioners and pension funds.

QE has on previous occasions been used to buy gilts, pushing up their price and forcing down yields.

That has added around £90 billion to pension fund deficits, according to the National Association of Pension Funds (NAPF), forcing firms to plug the gap with money that could otherwise boost growth and employment levels.

For people reaching their retirement QE has contributed significantly to a 20 per cent plunge in the income they can secure through buying annuities.

Given the vast majority of retirees use their pension funds to buy annuities, millions of people will pay the price of QE for the rest of their lives.

Pensioners are being left to suffer the consequences of QE and any failure to redress that when considering how to use any further stimulus would be shameful. Judging by the sentiments of the policymakers at the Bank of England, however, pensioners and pension funds can expect very little sympathy.

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Deputy governor Charlie Bean this week claimed that QEs positive effect on share prices had balanced out the detrimental impact on pension fund liabilities.

It’s an alarming suggestion, given that pension funds have seen their liabilities soar by 50 per cent since 2008, significantly more than the rise in share prices.

David Miles, Bean’s colleague on the Bank’s Monetary Policy Committee, has been at it too, attempting to undermine the role that QE has played in depressing pension pay-outs for workers reaching retirement over the past four years. He also argued that share price gains resulting from QE would compensate for reduced annuities by boosting pension pots.

It’s a shockingly flimsy argument from a member of the rate-setting panel. Not only is there little evidence that the most recent tranches of QE have boosted share prices, but most people move out of equities into less-risky asset classes as they approach retirement and so would have enjoyed little benefit from any share price rise.

Christine Lagarde at the IMF, pictured below, also suggested that the Bank of England could chop interest rates again, even though with the rate at 0.5 per cent the bank really doesn’t have a lot of wiggle room.

A rate knock down to 0.25 or even 0 per cent would be deeply unpopular with long-suffering savers and cheered by homeowners on standard variable rate (SVR) mortgages. But no one will benefit. Lenders have for some time been raising their SVRs and any cut would merely allow them to boost their margins. I’d be very surprised if even one lender reacted to a further interest rate cut by lowering its SVR. At best it would allow them to leave their SVR where it is and not increase it further.

Unfortunately banks and building societies would be more responsive to a rate cut when it comes to their savings products. That the margins on the best buy savings deals on the market now are as wide as we can expect has been somewhat under-appreciated. With wholesale bank borrowing getting more expensive the battle for savings deposits has intensified. An interest rate cut would take the heat out of that, at the cost of savers.

The spread between the base rate and the top cash Isas, for example, is some 3 percentage points. That’s as wide as providers are likely to go. Inflation may be edging down, for now at least, but that’s where the good news ends for savers – and an interest rate cut would be yet another kick in the teeth.