Jillian Thomas DipPFS, Managing Director, of Future Life Wealth Management Ltd discusses issues surrounding quantitative easing measures
Mervyn King and his colleagues at the bank of England decided to use quantitative easing to help the failing British economy. This untested and experimental method is impacting on our short and longer term livelihoods with potentially disastrous consequences. One area that is not often discussed is the effect QE is having on pensions and pensioners.
Quantitative easing is the term used for the Bank of England’s purchase of government debt, (i.e. gilts) with newly created money. This increases the price of gilts and reduces the yield. These actions have taken gilts out of a no risk/little return asset class into a some risk/some return class.
Money purchase pensions, which include personal pensions, are normally used to buy an annuity when the member retires. The reduction in gilt rates as a result of quantitative easing has and continues to dramatically reduce annuity rates.
Gilt rates are also used to determine the future funding requirements for defined benefit schemes, more often known as final salary schemes. The falling gilt rate is impacting on the assumptions actuaries use to calculate the cost of providing benefits which has the potential of increasing the pension scheme’s deficit. This means that an organisation and its pension scheme members must provide additional funding. For the company, therefore, less cash is available for expansion and creating new jobs.
Unisex annuity rates
Another challenge facing annuity rates later this year will be the effect of EU legislation requiring unisex annuity rates. Women historically live longer than men; this means that life assurance is less expensive for women than men and that annuity rates are more expensive for women than men.The European Court of Justice ruling regarding the legality of gender-based pricing in insurance underwriting means that after the 21st December 2012 the practice of using gender as a factor when compiling a quotation for an annuity and life assurance will be prohibited.
You might expect these new ‘unisex rates’ to rest half way between current male and female rates but it appears that many providers will, in fact, be offering ‘unisex rates’ just above current female rates. Many women will, therefore, be worse off as a consequence because 80% of annuities are bought by men to support them and/or their partner.
In addition to unisex rates, a further piece of EU legislation: Solvency 11 will have an impact on annuity rates. Solvency 11 will change the way insurance companies assess their liabilities. They will have to keep more money in reserve. That means there will be less money to offer in annuity payments.
In addition to the impact of quantitative easing and EU legislation, defined benefit pension schemes have recently had to change their accounting procedures as a result of FRS17 (an accounting standard). These changes have resulted in an increase in the deficit of many schemes which is assessed as money owed by the company. This in turn could increase the claims made against the Pension Protection Fund which will increase the levy charged to member pension funds.
Quantitative easing, unisex annuity rates, Solvency 11 and FRS17 all have the potential to create the perfect storm for future retirement planning, culminating in further closure of final salary schemes and significantly increased levies for those that continue to exist.
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Future Life Wealth Management Limited is Authorised and Regulated by the Financial Services Authority