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New OAPs to be hit by 'quantitative easing'
Hundreds of thousands of people approaching retirement will be offered far lower pensions for the rest of their lives as a direct result of the government's decision to "print money" in an attempt to stimulate the economy.
Experts have told the Observer that those who use their pension funds now to buy annuities - which guarantee them a set income a year until they die - will receive much lower pensions than they could have just a few weeks ago.
Experts also warn that final-salary pension schemes, which guarantee employees a set percentage of their income at retirement, for life, are heading deeper into crisis because of the government's experiment with quantitative easing, the banking term for printing money.
The latest cut in annuity income comes on top of a collapse in pension funds since the autumn as the credit crunch has bitten and stock markets have tumbled.
Pension income from annuities had already dropped by about 10% from its height last July before the government announced its plan to print more money. Calculations by leading investment firm Mercer show that a 60-year-old male with a pension pot worth £500,000 would now be offered an income close to £28,900 a year by an insurance company selling annuities, compared with £30,600 if he had struck a deal before the government began the quantitative easing experiment earlier this month.
Deborah Cooper, head of Mercer's retirement resource group, said the difference between levels now and earlier in the month could be attributed to quantitative easing - the policy under which the Bank of England is buying back £150bn of gilts and bonds at high prices to flush more money into the economy and kick-start activity.
But because the policy drives up bond and gilt prices, the set income (or yield) from these assets falls proportionately. Crucially, the pension industry uses these yield levels as the basis for calculating pension income, meaning that if the yield falls, so do annuity rates.
Ros Altmann, an economist and pensions expert, said quantitative easing had been "a disaster", not just for people taking out a pension annuity but for the economy as a whole, because much of the money being used to buy back gilts was then being invested overseas.
"What the government has done is effectively steal some of people's pensions on a policy that does not work," she said. "For the half a million people who are due to retire this year it is a disaster."
Clive Fortes, of pension consultants Hyman Robertson, said: "The government is trying everything to kick-start the economy. If this works, pensioners will be the collateral damage for getting the economy moving again. If it does not work, it will look like it was bonkers."
Quantitative easing has also had a serious impact on company pension schemes, pushing them billions of pounds further into deficit. The yield on gilts is an important factor when company schemes work out their obligations to future pensioners: when the yield falls, it pushes the liability figures up.
Shadow work and pensions secretary Theresa May said: "One of the side-effects of quantitative easing will be a negative impact on pension funds and pensioners. Yet again pensioners are having to pay the price for Gordon Brown's age of irresponsibility."
Vince Cable, the Liberal Democrat Treasury spokesman, said the government should scrap or suspend rules that force pensioners to buy annuities by the age of 75.
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