Stimulus Plan Creates Uncertainty for Pension Funds

Earlier today the Bank of England announced further plans to help kick start the economy.

Alongside the European Central Bank and among other measures, the Bank of England are set to add more fuel to the economic fire by pumping a further £50bn into the UK economy over the next four months, another extension to the quantitative easing programme and another attempt to ease the effects of the economic crisis.

The Bank of England have decided against a change to the base rate of interest, which has stood at a record low 0.5% since March 2009.

Furthermore, the European Central Bank have reduced theirs from 1% to 0.75%. Their deposit rate was also cut, from 0.25% to zero in an attempt to encourage banks to lend to each other.

It comes just a week after Sir Mervyn King said he had been left ‘shocked’ at the pace at which conditions had worsened, with the Euro crisis currently the biggest threat to the UK economy and the Bank of England confirming that the UK economy is back in recession after a year and a half’s worth of minimal growth.

However, pensions experts have warned that retirement may suffer as a result.

The National Association of Pension Funds say that while these measures are designed to boost economic growth, they could actually damage retirement values to an even greater extent.

With the changes set to increase the total value of expected asset purchase to £375bn, Joanne Segars, chief executive of the National Association of Pension Funds explained that this will ‘increase the deficits of final salary pension funds and mean that people get a worse rate on their annuity’.

She went on to explain that those who are on the verge of retiring could find themselves locked into a weaker pension.

She did concede, however, that a stronger economy would benefit pension funds.

Other measures put forward by the Bank of England include providing banks with access to cheap credit on the basis that they lend this onto businesses and providing banks with access to cash, should they encounter any short –term funding difficulties. Further stimulus measures may be considered if growth in the economy continues to decline.