MP's want compensation for pensioners suffering low interest rates

grizzly1911

Graham_Devon wrote: »

A lot of it is to do with annuities though.

Someone called in 5 Live today and said that they were "due to retire" in the next 2 years.

They had been provident and had a personal pension pot of £200K. Apparently their expected pension would have been c.£15K pa pre crash, revised to £10K pa pre QE so unsure what it would look like now.

They made the point that that is more than £5K pa for the rest of their life. They made the contributions to that pension pot in good faith over many years and have effectively been "robbed" by political/economy policy.

Doesn't sound like a good advert for saving in a pension.

Don't forget the Government uses these pension funds to "oil" the economy.

StevieJ

I know what they could do, what about an extra personal allowance and call it something like, err 'age allowance'

chewmylegoff

Graham_Devon wrote: »

I know the two are seperate things, I only use them to create an analogy.

But in regard to the safety net, could you not say that to so many things? Why should employers pay redundancy, theres a welfare safety net. Why shouldn't employers simply be able to cut wages 50%, theres a safety net etc.

i suppose you could argue that, but the function of government is to make sure that its citizens don't starve on the streets, not to try to guarantee the performance of their private investments.

It's not so much savings, it's the issue that QE directly reduced pensions. I'm sure workers wouldn't be best pleased if their pension pot was cut 40% overnight and were told "but theres always welfare".

there are some downsides to monetary policy and some people will lose money, but you cannot hive off that effect and say that someone should be compensated for it, whilst ignoring the general benefits that those persons have also received as a result of the govt's policy.

it seems pensioners want to be put back into a position that they would have been if QE and 0.5% interest rates had not happened.

that's fine by me, what do you think would have happened if interest rates had remained at say 5.5% and if there had been no economic stimulus? do you think annuity rates would have been higher or lower than they are now? what do you think would have happened to the value of investments held within people's pension pots (shares aren't worth much when the company is bust)? what would have happened to the value of their homes?

i dare say that, despite lower annuity rates, all pensioners (and all of the rest of us) would be significantly worse off if we had followed an economic course designed to support annuity rates, as we would now look like a cross between greece and congo.

as long as you strip out the effect of all of the upside that people have received as a result of the monetary and fiscal policies that the government has pursued, i am happy for them to be paid compensation for the downside loss (although i rather suspect that they would be paying the goverment money rather than the other way around).

chewmylegoff

grizzly1911 wrote: »

No where near being a pensioner but that would make me just blow the lot and live on the safety net.

On the basis I couldn't subsidise the safety net from my own provision then the safety net would have to rebased and increased.

Not really sure what you're saying - are you saying that the only point in making financial investments is if the govt underwrites their performance, and that if it doesn't then you should just spend all of your money and hope that the govt will pay you enough for a comfortable existence?

i find it quite hard to believe that you would really do that.

If people want their investments to be insured by the govt, then that is fine, but I should think tax will need to quadruple or something.

Jennifer_Jane

Sorry, cannot add much to this debate, but I did see Sir Mervyn King on the Finance Committee debate yesterday (Parliament Live, but a Committee Meeting, not the Commons, obviously), saying that QE did not affect annuity rates. He gave reasons, but I'm afraid my eyes glazed over and my brain atrophied yet a little more, so cannot give his reasons.

I was surprised at this as I understood that it was common knowledge that QE had affected annuity rates, but he said categorically that it was other factors (he mentioned coupons and other financial terms which were above my concentration levels).

Just offered for info, not really for debate.

DervProf

Jennifer_Jane wrote: »

Sorry, cannot add much to this debate, but I did see Sir Mervyn King on the Finance Committee debate yesterday (Parliament Live, but a Committee Meeting, not the Commons, obviously), saying that QE did not affect annuity rates. He gave reasons, but I'm afraid my eyes glazed over and my brain atrophied yet a little more, so cannot give his reasons.

I was surprised at this as I understood that it was common knowledge that QE had affected annuity rates, but he said categorically that it was other factors (he mentioned coupons and other financial terms which were above my concentration levels).

Just offered for info, not really for debate.

This does not suprise me. MK said that the rise in inflation a couple of years ago was "just a blip". He has also more recently told us that inflation would be falling this year. Only time will tell on that one, but it's not looking too promising at the moment.

Pennywise

grizzly1911 wrote: »

They had been provident and had a personal pension pot of £200K. Apparently their expected pension would have been c.£15K pa pre crash, revised to £10K pa pre QE so unsure what it would look like now.

But how much of that £200k was investment income (i.e. interest, dividends, capital gains etc), as opposed to premiums paid in?

You could argue that they benefited from over-generous investment returns during the artificially good years.

Certainly, if the fund was relatively old, a lot of its value would have been from the boom years.

It's only if the funds had been paid in relatively recently that they wouldn't have benefited from the artificial boom years.

Yes, it's tough that a timing issue has lost them a load of pension, but that's life isn't it? It worked the opposite way for a lot of people who benefited by retiring when times were good - i.e. annuities were arguably too high! Sometimes it's a matter of luck. Also, there is the other issue of whether it was wise to put all their pension plans in one "pot" - common sense would dictate having a number of different vehicles for funding your retirement, not just a single pension scheme, in order to spread the risk of this kind of scenario.

Graham_Devon

chewmylegoff wrote: »

i suppose you could argue that, but the function of government is to make sure that its citizens don't starve on the streets, not to try to guarantee the performance of their private investments.

Yep, agree totally.

And this, I believe, is where it becomes blurd. Afterall, Even Mervyn King is suggesting that QE was used to bolster up house prices, and therefore suggests they should take into account their assets may have risen.

Either Mervyn believes retired folk do, in the majority have assets they can simply sell, or he was talking predominently about house prices. He suggests their drop in income have been offset by the rise in asset prices that QE has fuelled.

But thats no good to a pensioner. They cannot use that money to pay their bills, or go on holiday or anything they planned for their earned retirement, not unless they sell the house and live somewhere for free. A few could downsize, but thats the few again. And even then, I'm not sure downsizing is a great answer to seeing your pension pot reduced by significant amounts.

Some people, and certainly these MPs feel (and Mervyn backs them up when claiming pensioners assets will have increased) that all has been done to protect those who may well have overborrowed (depends how thats defined), at the cost of those who have planned and paid into retirement.

I can certainly see where they are coming from. But I just don't know how you would give compensation to those people, while ignoring those who either didn't borrow or haven't been able to borrow because of the highly priced assets, which Mervyn suggests they have succesfully increased the prices on.

I think all we are begining to see a realisation in the press that QE was good for a few, but is really starting to effect others, either in terms of pensions, or freezing them out of the market alltogether through price control of sorts. Maybe we are seeing this because those who benefitted are now seeing those benefits wiped out in terms of inflation and mortgage rate increases, so have become less passionate about monetry policy as they too are no longer benefitting.

With all the other press stories about IO mortgages, reposessions and warnings etc, it feels like they are finally starting to catch on to the fact that all we have done for the last few years is protect the few who borrowed at the expense of everyone else.

I can see the argument people such as the MPs have, I just think it will cause a domino ripple effect across every else, especially the younger generation priced out of everything, housing, pensions, education, the lot.

chewmylegoff

Jennifer_Jane wrote: »

Sorry, cannot add much to this debate, but I did see Sir Mervyn King on the Finance Committee debate yesterday (Parliament Live, but a Committee Meeting, not the Commons, obviously), saying that QE did not affect annuity rates. He gave reasons, but I'm afraid my eyes glazed over and my brain atrophied yet a little more, so cannot give his reasons.

I was surprised at this as I understood that it was common knowledge that QE had affected annuity rates, but he said categorically that it was other factors (he mentioned coupons and other financial terms which were above my concentration levels).

Just offered for info, not really for debate.

QE definitely affects annuity rates, and King wasn't arguing that it didn't.

QE = BoE buying UK gilts. As BoE is buying lots, the market price of UK gilts goes up. This means that (for the sake of a simple example) you might have to pay £110 for a gilt which would previously have cost £100 and which pays an interest rate of 4% (nominal value of the gilt also £100 - i.e. always pays annual interest of £4 regardless of market price).

Therefore instead of receiving a 4% return on your investment you receive a return of 3.6%.

When someone sells you an annuity, they fund the annuity by using the money you give to them to buy gilts. If they can only get a 3.6% return instead of a 4% return, then the annuity rate will go down.

King's argument was that because QE inflates asset values (not just gilts, but shares and so on, because the people who sell the gilt to the BoE may use the money to buy shares instead of more gilts), the value of the assets in your pension pot will increase.

Thus, you pension pot will be worth more, but the rate of the annuity you can buy with that extra money will be lower. BoE's argument is that your pension pot will be worth £110 instead of £100, and therefore you will still receive an income of £4/year. However, I'm not aware of any data produced by the BoE to support this claim.

Not sure if this makes sense reading it back...

wotsthat

Graham_Devon wrote: »

I think all we are begining to see a realisation in the press that QE was good for a few, but is really starting to effect others, either in terms of pensions, or freezing them out of the market alltogether through price control of sorts. Maybe we are seeing this because those who benefitted are now seeing those benefits wiped out in terms of inflation and mortgage rate increases, so have become less passionate about monetry policy as they too are no longer benefitting.

Did QE protect the UK from a credit led depression? If it did then every single person has benefitted from QE.

Don't expect the press to delve to deeply - "it could be worse" as a headline isn't going to sell many papers. If MP's weren't hand-wringing about pensioners they be 'feeling the pain' of someone else.