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Annuity rates crisis puts pensions in ‘death spiral’

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The Monetary Policy Committee is being urged to consider the 'irreparable damage' that quantitative easing will have on UK pension schemes by leading pensions experts.

According to Saga, by printing new money (QE) to buy gilts and forcing down long-term interest rates, the Bank of England has caused huge problems for many UK firms.

UK pension deficits for FTSE 100 firms have more than doubled in the last year alone, despite companies pumping millions into their schemes to repair their pension shortfalls.

Dr Ros Altmann, Director-General of Saga said: “This is turning into a ‘death spiral’. The lower gilt yields fall, the worse pension deficits become. The worse pension deficits become, the more trustees will feel they need to ‘de-risk’.

“This often means buying more gilts which itself means worse deficits because trustees are competing with the Bank of England which is also trying to buy gilts due to QE.

“Added to this, many employers will want to get rid of their pension risks altogether, which would mean ultimately a full buyout – but the lower gilt yields fall, the higher the costs of buyout and the more unaffordable that option becomes.”

The Bank of England (BoE) voted earlier this week to keep base rate at 0.5% and maintain its quantitative easing programme at £375bn.

The base rate has now been on hold for 41 consecutive months despite speculation that the Bank would cut interest rates to 0.25% after the Office for National Statistics (ONS) revealed weak GDP figures for the UK economy.

Altmann continued: “Firms are left trying to find more money to plug pension deficits, causing funds to be diverted from creating jobs and expanding operations.

“Worryingly too, companies trying to borrow money to expand (or to meet a pension recovery plan) are finding the banks increasingly unwilling to lend because of the pension deficit. This vicious circle must not be allowed to continue. Artificially inflating pension deficits is hampering economic recovery. 

“QE is also damaging annuity rates, so the distortions are occurring right across the UK pension system, from defined benefit to defined contribution and then on into retirement.”

Annuity rates, which dictate how much a worker gets from their pension pot for the rest of their lives, hit an all-time low this week, and are predicted to fall even further.

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