Quantitative easing (QE) celebrates its tenth anniversary shortly, the economic stimulus having been first announced on 5th March 2009. So what impact has QE had on pensions? Contributor Nathan Long, Senior Analyst – Hargreaves Lansdown.
Defined benefit pensions are looking rosier, aggregate shortfall has fallen to £23.1 billion from £204.7 billion… but it’s been a rocky ride, the shortfall grew as large as £413 billion despite increased contributions. Pension fund values have been rising – the average managed pension fund was up 144 percent as QE both in the UK and overseas helped prop up asset prices.
Nathan Long, senior analyst at Hargreaves Lansdown: “QE may be credited with saving the country’s bacon in the aftermath of the global financial crisis, but it has been a mixed blessing for our pensions. An unpleasant side effect of this monetary medicine sent the cost of providing guaranteed retirement income soaring, and consequently companies have been forced to shovel significantly more money into their pensions. Retirees weren’t immune, either forced to buy annuities that were paying less than they’d expected or shunning guaranteed income for the unpredictability of drawdown.
Interest rates look destined to be lower for longer, so a return to higher annuity rates doesn’t appear likely any time soon. Defined benefit pensions are in relatively good health despite some high profile schemes ending up in the lifeboat scheme. Members can take comfort that employers have been funding their pensions heavily to honour the pay-outs they’re due.”
Defined Benefit Pensions
In 2009 88 percent of defined benefit schemes were in deficit to the aggregate tune of £204.7 billion. The picture today looks far rosier, with 59 percent in deficit with an aggregate of £23.1 billion, but this masks an unstable interim period which saw the aggregate deficit climb to an eye watering high of £413.1 billion by August 2016.
Since August 2016 the deficits have fallen significantly, as relatively static gilt yields have kept liabilities at broadly the same level whilst assets have grown over the same period, so narrowing the deficits.
Annuities and Drawdown
In February 2009 a 65 year old man could buy an annuity income of £7,214 from a £100,000 pension, fast forward to today and that same pension could buy a 65 year old only £5,206. The annuity rates don’t fluctuate as much as gilt yields but are heavily influenced by them.
The interim period saw the launch of the pension freedoms in April 2015 which saw a seismic shift in how people access their pension, with the growing popularity of either cashing in pensions entirely or remaining invested through drawdown, at the expense of annuity sales. In March 2009, we estimate there were more than 16 active annuity providers, whereas now there are only six selling annuities in the open market.
The pension freedoms were a catalyst for a surge in drawdown popularity, but they also brought rule tweaks that altered how much you could draw from your pension. Back in 2009 the amount you could take from your drawdown pension was limited by Government rules that took into account your age and the prevailing gilt yield. In March 2009 the maximum a male aged 65 could take every year from drawdown was £8,160 and this would need to be reviewed every five years. Following several modifications the rules today let you draw as much or as little as you like.