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To be published as HC 902




Treasury Committee

Quantitative Easing

Tuesday 29 January 2013

Mark Hyde-Harrison, Ruston Smith and Mark Gull

Dr Ros AltmanN and Simon RosE

Evidence heard in Public Questions 1 - 101



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Oral Evidence

Taken before the Treasury Committee

on Tuesday 29 January 2013

Members present:

Mr Andrew Tyrie (Chair)

Stewart Hosie

Andrea Leadsom

Mr Andy Love

Mr Pat McFadden

John Mann

Mr George Mudie

Mr Brooks Newmark

Jesse Norman

Teresa Pearce


Examination of Witnesses

Witnesses: Mark Hyde-Harrison, Chairman, National Association of Pension Funds, Ruston Smith, Chairman, Retirement Policy Council, NAPF, and Group Pensions Director, Tesco, and Mark Gull, Investment Council Member, NAPF, and Co-Head of Asset and Liability Management, Pension Corporation, gave evidence.

Q1 Chair: Good morning. Thank you very much for coming to give evidence this morning. Can I begin with a relatively straightforward question, which I think goes to the heart of quite a bit of all this? Do you agree with the Bank of England’s view that the falls in annuity rates have been broadly offset by the boosting effect on equity prices of QE? I will start with Mr Hyde-Harrison, since you are in the middle, and then I will go to your wingmen.

Mark Hyde-Harrison: Thank you very much. I think the question needs some qualification. In terms of DC investors, where they have their own pot of money and they have a tendency for their assets to be moving towards assets that match annuity prices as they retire, the fall in gilt prices has been largely matched by the assets they hold in their pot.

Q2 Chair: Are you supporting the Bank’s view, as they put it, that it has had a broadly neutral impact on a fully funded defined benefit scheme?

Mark Hyde-Harrison: No.

Q3 Chair: You are not agreeing with that?

Mark Hyde-Harrison: That was not the point I was making. The point I was making was around DC schemes.

Chair: The DC schemes. I am sorry. I thought you said DB schemes.

Mark Hyde-Harrison: What we are seeing is that most schemes were not fully matched at the start of the crisis. Most of them had investment strategies with an effective shorter duration, like equities, than their liabilities. Therefore, the impact of QE has been much greater on their liabilities than increasing their assets and deficits have arisen. There are some theoretical cases, and that is what the Bank of England study showed, where a scheme that is in balance and well-matched the effects on the assets and the liabilities would be the same, but it was quite a theoretical example.

Q4 Chair: Comments from either of you?

Mark Gull: I very much agree with what Mark has said. The other issue that is important in all this is that the pensioners in a DB scheme, as long as the company is able to close that deficit and put more money in, are going to get their pensions as they have been expected. However, it means that money has been coming out of the corporate sponsors to go into the DB schemes to close those increased deficits.

Ruston Smith: I would concur with those points. The key thing is that in the UK a relatively small proportion of defined benefit pension schemes totally match their liabilities. What that means in practice is that they have assets that do not match those liabilities and therefore do not match gilts. That is basically where you find yourself in a position where lower gilt yields have increased liabilities and have led to higher deficits and higher contributions.

Q5 Teresa Pearce: Given that the Bank should be thinking about the economy as a whole, how much weight should be given to the fact that pension funds with a deficit have been worse off by quantitative easing when comparing that cost to other benefits? How badly do you think QE is affecting underfunded schemes in particular?

Mark Hyde-Harrison: The impact of the £375 billion quantitative easing under the numbers that we worked out at the NAPF is that deficits in defined benefit pension schemes have increased by around £90 billion. Those numbers largely agree with the Bank of England’s own studies. What we are seeing is the effect of QE, which is an economic policy for the wider economy, has had a significant effect on one sector, defined benefit schemes, largely as a result of the mechanisms that we have in the way of valuing defined benefit pension schemes at the moment. That £90 billion has been created by the fall in gilt yields. The argument we have is not particularly with QE and what the Bank of England is doing. That may well be the necessary economic medicine. It is more about the way in which, once that £90 million deficit has been created, the regulatory framework that exists in the UK requires companies to fill it. The regulations for the Pensions Regulator to operate were drawn up prior to 2007 and we do not believe they are flexible enough to cope with the environment that we are now in. We are seeing companies having to make contributions to their pension schemes to fill those deficits, and that is the effect on the economy, so it negates some of the benefits of QE.

Q6 Teresa Pearce: So, forcing firms to plug that gap rather than invest elsewhere is what you are saying?

Mark Hyde-Harrison: Yes.

Q7 Teresa Pearce: How significant do you think that impact will be on the wider economy over the next few years? That is a knock-on of quantitative easing and the regulations.

Mark Hyde-Harrison: The quantitative easing impact, as I said, is £90 billion. A rough rule of thumb would be that the Pensions Regulator would expect that £90 billion to be filled over 10 years, which would equate to about £9 billion a year. It would depend on particular schemes and negotiations. We saw pension contributions increase over the last year by about £4 billion to £5 billion and the deficit contributions rising from about £12 billion to £16 billion. We are seeing the flow-through in contributions rising into pension schemes at the moment.

Q8 Teresa Pearce: If they were not using that money to plug that gap, what do you think they would be investing in? Would it be increased employment, would it be capital investment? Have you seen any pattern? Can you give any guess?

Mark Hyde-Harrison: The honest answer is we represent the pension funds and we do not run companies. If the companies had the money, exactly what they would do with it would be difficult for us to say. But putting the money into the pension funds at the moment does not necessarily, in our view, produce stronger pension funds. A strong economy with strong companies produces strong pension funds. Simply trying to fill funding gaps at this point in the cycle may not produce the best result for pension funds.

Q9 Teresa Pearce: You mentioned the regulations, that that is what companies have to do. What would be the effect if they did not do that? Would it be the pensioners that suffered?

Mark Hyde-Harrison: You have to question whether the deficits are true deficits at the moment. Are we truly valuing the liabilities of the pension schemes appropriately? What we are using is a mark to market on the gilt rates as of today, and is that market a true market? We have the Bank of England owning a little over a third of the gilts issuance-they are the only issuer-and most of the people buying are pension funds and long-term insurance companies. So the market that is determining this market price may not be as diverse as we would normally like to be the way in which to price these liabilities over the next decades.

Q10 Stewart Hosie: The OBR have suggested that when QE is wound up the Treasury will profit to the tune of around £55 billion from the unwinding. The written evidence submitted to this Committee suggested that some of this could be used to offset the distributional impact that you have described of QE. Is that something you would welcome? First of all, let me ask another question. Do you believe that £55 billion figure is even remotely accurate?

Mark Hyde-Harrison: What I will say is I have not seen that OBR number and I do not know how it was arrived at. I think with any unwinding of QE it would be very difficult to foresee what the economic conditions are at the time or the way in which the Bank of England decides to unwind QE. Therefore, I find myself in a position of saying I do not know if that is right or wrong. I have no particular views. If they are willing to help with the distributional impacts of QE, we would welcome that and want to have a discussion.

Q11 Stewart Hosie: What form would helping with the distributional effects take? What would the most beneficial thing be in relation to pension funds and this nominal £90 billion gap?

Mark Hyde-Harrison: Does anyone have any particular views?

Mark Gull: As Mark has said, some of the issues are to make sure that the pension funds with the weaker sponsors and weaker covenants survive so you do not get situations like Dawson International that fell over because of contributions to its pension funds. The pensioners there will now get a lower pension than they would have expected. If schemes end up in the PPF, typically they get between 10% and 50% lower benefits. Something that allows flexibility there will help. It is not necessarily about spending the money. It is about allowing the pension schemes a greater time or greater allowance to deal with the effects of QE and the distortion it has had on the market.

Q12 Stewart Hosie: Flexibility rather than a direct cash payment to top up?

Mark Gull: I think flexibility would certainly be very welcome.

Mark Hyde-Harrison: The other point you could look at also is supporting the PPF. If companies have fallen into the PPF, then the cost of dealing with those pensions would fall on the rest of the industry.

Q13 Stewart Hosie: When you say supporting the PPF, do you mean allowing the existing levy payers not to pay and replacing or topping up the PPF?

Mark Hyde-Harrison: If pension schemes went into the PPF with substantial deficits, in the end those deficits might have to be made through levy payments from other funds. It is a form of tax on those who offer pension schemes. You could offer help to deal with the deficits that fell into the PPF.

Q14 Stewart Hosie: Not today, but it would be helpful if you could quantify how much help might be necessary so that we can look at an expected cost as well as this very large potential profit. I am sorry, Mr Smith. You were going to add something?

Ruston Smith: Yes. I was going to say that the other consequence of this is that in 2007 around about £9 billion was paid towards deficit contributions. In 2012 it has gone to £36 billion, an increase of 300%. One of the Pensions Regulator’s objectives is to prevent schemes from going into the PPF and by balancing this out and making sure that not too much money goes into the pension fund and instead is reinvested back into businesses, strengthening the covenant, that then supports that objective of the regulator.

Q15 Mr Newmark: Looking at alternatives to QE, do you think that there are other alternatives that should have been considered at the time of the original decision?

Mark Hyde-Harrison: I will start by saying from the NAPF point of view we believe that the central bank should undertake what measures it believes are necessary as the central bank. We do not particularly comment on what options they have. I don’t know if you want to say something?

Mark Gull: I think it is worth saying that at the time when QE originally happened, 15-year gilt yields were about 4.4%. The markets were worried about deflation at the time and financial markets were very weak. I think the initial round of QE was a very good thing overall for the markets and there were positive responses, and the signal that extraordinary measures were prepared to be done was very welcome. It comes back to the point that Mark has already made, that for the integrity of the pension system we need a strong economy, so we will support any measures we see help the economy. The Bank of England has said during different rounds of QE that banks were struggling with funding, and you need strong banks for a strong economy. They need to be able to lend and, with the deleveraging process that they are going through at the moment, the Bank of England was prepared to buy non-gilt assets-corporate bonds, as long as they were not financials-if it was identifying the problem in the financial system. Maybe that is where some of the aid is needed, and indeed, they seem to have recognised that by moving towards the Funding for Lending programme.

Q16 Mr Newmark: That sort of answers my other question, which is that, going forward, are there other alternatives that you might have thought about to QE itself?

Mark Gull: Speaking in my capacity working for the Pension Corporation, what we have suggested is that there are other things they can do. For instance, in the US they have run a TAR-troubled asset relief-type programme. Helping the banks sort out and get cleaner balance sheets is potentially very useful for getting them in a position where they can lend again to have a strong economy.

Q17 Mr Newmark: You have anticipated my question, so thank you for that. In its analysis on the effects of QE, the Bank assumed that the £125 billion of QE between October 2011 and May 2012 was as effective as the first round. Do you think that is correct to assume?

Mark Gull: I think probably not, given how much lower gilt yields were at the time. Certainly by the time they got around to QE3, gilt yields had halved, so they were nearer 2.2% at the 15-year point rather than 4.4%. The impact of the signalling and the messaging that they were starting extraordinary measures would not have been so strong.

Q18 Mr Newmark: By that, can I assume that you see only very marginal benefits to further QE?

Mark Gull: Further QE by buying gilts and pushing down yields when we are at these very low levels probably has marginal benefits going forward.

Q19 Mr Newmark: If I push you a little bit further, is the implication of that that actual harm can be created by further QE?

Mark Gull: One of the things we have seen in the pensions system is the impact that it has on deficits, and it is quite clear that one of the factors of pushing gilt yields down, because gilt yields are used to calculate pension fund discount rates, is that deficits increase. On average, if gilt yields move a basis point-

Q20 Mr Newmark: That is a very technical answer. I want to reflect a question I asked the Governor of the Bank of England when I asked him, does he think about the impact that low interest rates have on the thousands and thousands of pensioners out there? His answer, in summary, was, "It is actually not part of my responsibility to care what the impact is on pensioners. That is not my remit." But surely QE has an impact on people who have saved their whole lives. When all of us meet our constituents, this is something they come back to. They do not understand QE, but they certainly understand the impact of QE, which is to keep driving down interest rates. Sure, it helps UK plc, it helps corporations, but it has a huge detrimental impact to pensioners throughout the country. I guess that is my question to you.

Mark Gull: Individual pensioners in a defined benefit pension scheme, as long as the corporate is strong enough and is able to make those extra contributions, will still get the pension that they were promised. For savers in DC schemes and for savers in other-

Q21 Mr Newmark: But pensioners who are living off savings are being dramatically affected. Would you not agree with that?

Mark Gull: It is slightly outside my area.

Q22 Mr Newmark: Mark, you are nodding?

Mark Hyde-Harrison: It is clearly the case, if they were living on savings-

Mr Newmark: Which many pensioners are.

Mark Hyde-Harrison: Which many pensioners are, and off the interest rates, and they have seen a dramatic fall in their income and the benefits-

Q23 Mr Newmark: In formulating policy, do you think the Bank of England should be cognisant of the impact QE has? They are always talking about the positive impact on UK plc, on corporates, borrowing, on people’s mortgages, but there are thousands and thousands of pensioners out there who, on the negative side of that, are suffering.

Mark Hyde-Harrison: I think it is something not particularly for the NAPF to have strong views on.

Mr Newmark: You must have a view.

Mark Hyde-Harrison: The Government has clearly set the Bank of England’s objectives as inflation, to target an inflation range and, secondary, to support the economy, which is what they are doing through QE. If you disagree with those, then I think it is up to the people who set the objectives for the Bank of England to give them a wider remit.

Q24 Mr Newmark: By choosing Mark Carney, who is taking a different approach than simply targeting inflation, the implication of the Chancellor’s decision is that perhaps he is considering other factors than just purely inflation and therefore simply continuing to drive down interest rates.

Mark Hyde-Harrison: There will be winners and losers if interest rates rise in the short term. What we are trying to say here is it is not a question about whether interest rates are too high or too low in terms of income received, but the consequent effect if you price things off the value of assets that are paying low interest rates that are artificially depressed. I think that is the difference from a cashflow effect, which I think is what is happening to savers and what is happening in pension funds, where we are using a valuation method to determine future contributions.

Ruston Smith: The key thing for us is to take some action to make sure, first, that we get the right balance in the funding of pension schemes and making sure that companies remain strong to support them. The second thing is looking at what we can do for people who are coming up to retirement in a defined contribution pension scheme, where the gilt yields are low and that means the pensions they are buying are very expensive.

Q25 Chair: Perhaps I could try to rephrase the set of questions that have come from a number of colleagues. Do you think that, in formulating QE, which is a huge policy of £375 billion, something that would have been considered unimaginable a few years ago, the Bank of England should have in mind the distributional impact?

Mark Hyde-Harrison: Whenever you have a policy that is as profound as that, you need to understand what the distributional impact is. I am less convinced whether it is for the Bank of England to decide how to change its policy in the light of that. I think many of the impacts could be mitigated by other institutions around the edges, and that is the point we are making. It is not that we have a problem with the Bank of England, but the way in which the Pensions Regulator is reacting to this environment.

Q26 Chair: So the answer to the question is, yes, they should have it in mind but, no, they should not vary the decisions they take. They should be aware of it, but not vary the decisions they take. On the other hand, other authorities may want to vary the decisions they take. Have I summarised your view?

Mark Hyde-Harrison: Yes.

Q27 Chair: What should the Government do?

Mark Hyde-Harrison: The Government should give a direction to the Pensions Regulator to be more flexible in the way it interprets the regulations. We are grateful that it is considering changing one of the objectives of the Pensions Regulator to consider the affordability of pension contributions from the employer’s perspective. If we do get a change in the pressure put on the Pensions Regulator, that would go a long way to helping deal with the distributional effects of QE.

Q28 Chair: I think that is clear, but it is important that we find out whether your colleagues either side of you agree with it. Do you agree in full with what you have just heard, Mr Gull? Then I will ask Mr Smith.

Mark Gull: Yes, I very much agree that more flexibility for the Pensions Regulator is a very good thing.

Ruston Smith: I agree. I think the important thing is that some trustees would want to make use of any further flexibility and others may not, so it is really important that we do not make it too prescriptive, but we give people the opportunity to do the right thing for their particular scheme.

Q29 Andrea Leadsom: Following on from previous questioning, can we be clear that you are saying that you would not have the Bank of England do things differently, but there is potentially a knock-on in that those companies who are having to make big payments to shortfalls on deficit pension schemes are in fact, therefore, diverting money away from, potentially, the real economy and into those pension schemes? For completeness, to get an overall picture, would you all agree with that statement? I think that is what you have alluded to.

Mark Hyde-Harrison: Yes.

Q30 Andrea Leadsom: You have all said you do not really feel you want to opine on the role of the Bank of England, but we must force you because this is an inquiry into QE, which of course is a policy of the Bank of England. Do you think that the line between fiscal and monetary policy is being blurred as a result of QE? The Governor has said to us that he believes that QE is just another monetary policy tool like any other. Do you think that is right, or do you think it is blurring fiscal and monetary policy?

Mark Gull: I think if we asked most of our pensioners, the honest answer is they wouldn’t care; they want policy that delivers a strong, stable, robust economy. That has to be the overriding thing because that keeps the integrity of the pension system. We are in extraordinary times with extraordinary measures, so if there is too much blurring, yes, there are risks further down the line, but I don’t think at the moment the markets are particularly worried about it. What they want to see is the right policy to get the economy growing.

Q31 Andrea Leadsom: If you are saying that the market doesn’t care, are you also saying that it doesn’t matter if the Bank of England is straying into fiscal from monetary policy?

Mark Gull: I think as long as they are giving the right policy and they are producing growth from it, the markets would be delighted.

Q32 Andrea Leadsom: Would you both agree with that, Mr Hyde-Harrison and Mr Smith?

Mark Gull: That is not a NAPF view; that is a personal view.

Mark Hyde-Harrison: If I look at it technically with what the Bank of England is doing in terms of the policy of QE, it could be summarised as messing around with its own balance sheet. It is not particularly taking risk on board in the Bank of England. If the policy is extended to other assets and risk is introduced on to the Bank of England balance sheet, then I think that probably is the line where it starts to cross over between the two. But for the moment now, I think they are carrying out operations on their own balance sheet, which would fall into monetary policy. That would be my view.

Andrea Leadsom: That is interesting. Mr Smith?

Ruston Smith: I have nothing to add to those points, thank you.

Q33 Andrea Leadsom: Do each of you believe that the Bank has been trying and continues to try to target 2% inflation and nothing else? Are they still within their remit? Mr Smith?

Ruston Smith: I will defer to Mr Hyde-Harrison on that one.

Mark Hyde-Harrison: Thank you, Ruston. I think it is clear in some of the things they have said-and again this would be more a personal view-that they accept that they have not kept the primacy of the inflation target in what they are doing, that there may be inflationary consequences by their actions. Before QE you would have said it was the primary target; I think it has been slightly watered down and is no longer of the same level of primacy in their objectives.

Q34 Andrea Leadsom: Would you both agree or not?

Mark Gull: I think broadly they are targeting inflation, but they are very aware that with the extraordinary state we find ourselves in it may take longer to get back to the levels and the measures will have to be a little bit different. But I think, yes, broadly they still are.

Q35 Andrea Leadsom: Coming on to the unwind of QE, the Governor has made very clear that the Bank of England’s policy when the economy recovers and they feel they need to tighten policy is they will raise interest rates by a quarter of a percentage point and then they will unwind the QE, by which they imply that they will sell the gilts back into the marketplace. What do you believe will be the consequences for the yield curve and for gilt markets and for your pension funds of that approach to unwinding?

Mark Gull: First of all, it is quite early to talk about unwinding QE. The last set of GDP data that we had out last week showed that in the fourth quarter GDP was minus 0.3%. It is still about getting the right stimulus to get the economy through, which is going back to our key point of what we want in terms of a strong economy. As to the unwinding, they are now the largest holder of the gilt market with around about a third of the market and if anybody tells you they are going to sell a third of the market there are clearly consequences. I think it has to be managed very carefully and it has to be managed in connection with the DMO who presumably will still be selling gilts at the same time. But I don’t think there is any magic wand of the right way to do it.

Q36 Andrea Leadsom: Can you be a bit more specific? What do you think will happen? You must have a view on what happens if you dump a third of the gilts on the market.

Mark Gull: If it was done as crudely as that, clearly gilt yields would rise quite rapidly.

Q37 Andrea Leadsom: Would you recommend to the Bank of England that they allow the gilts to run off instead?

Mark Gull: I think that is probably going beyond our remit and I think it depends on the-

Andrea Leadsom: I am asking you for an opinion.

Mark Gull: I think it depends on the economic circumstances at the time. It is very difficult to say exactly what you should do without knowing what the events will be at that time.

Q38 Andrea Leadsom: Mr Hyde-Harrison, do you have a view?

Mark Hyde-Harrison: Our objectives would be that we would want a transparent and orderly gilt market. That would be right up there as the first point where we do not want market pricing to be swinging wildly and trying to second-guess what the Bank of England may be doing. In terms of the mechanics of unwinding QE, you would have to make the decision of how to approach it based upon the conditions at the time when you were unwinding it. When the economy would seemingly be in growth, being able to support an increase in interest rates as you alluded to, I think you would have to make a judgment at that time, and we would expect to be consulted widely on that to consider the impact.

We would hope that, if QE was unwound, the promise that these gilts would be bought back is fulfilled. That is necessary for the inflationary expectations, that this is not allowed to simply be cancelled or such like. You would have to look at the economic conditions at the time for the actual mechanism.

Q39 Andrea Leadsom: So you would not support the idea of cancelling the gilts?

Mark Hyde-Harrison: I think that would be very strong medicine indeed and would need very extreme conditions at the time to be able to reach that judgment.

Q40 Andrea Leadsom: Mr Smith, how would you want the Bank to communicate with the pensions industry on any unwind of QE?

Ruston Smith: I think it is really important that they consult us to look at the best way in which to do this. One of the solutions that has been put forward to overcome the problem we have at the moment with low gilt yields and high contributions is smoothing. For example, you were talking about perhaps higher interest rates and more gilts coming back into the market. The economic impact of that would be higher gilt yields and, therefore, lower liabilities. So the smoothing impact could be detrimental because that, in the short term, helps, but as interest rates go up, if the smoothing still had a low yield attached to it, then there would be a drag. So it is important we have a constant communication and try to make sure we get this right.

Q41 Chair: I was wanting to explore and clarify what you meant, Mr Hyde-Harrison, by more flexibility for the regulator. One of the key ways in which flexibility could be provided is exactly what you have just said, Mr Smith, which is to enable the discount rate to be smoothed. But you have just made an eloquent case against that, haven’t you?

Ruston Smith: What I have said is that smoothing is just one way in which you deal with the problem. I am not absolutely convinced that that is the best way, for the reasons I have just-

Q42 Chair: I will come on to other ways, but just on smoothing, you have made the case quite well; the main argument used against smoothing is exactly what you just said, that in the long run gilt yields may rise and this could turn out to be very bad news. In other words, we need to know whether these long rates are there to stay, and that is looking into a crystal ball, which is a dangerous game.

Ruston Smith: That is correct, because I think there are better ways in which we could achieve the same thing.

Q43 Chair: We will come on to that in just a moment. So we are crossing off smoothing from your toolkit list that you want to talk to the regulator about. Correct?

Ruston Smith: It is my least preferred option. I think there are other options. We need to look at all the options.

Chair: You are putting it low on the-

Ruston Smith: I am putting it lower down on the list of options, yes.

Q44 Chair: Okay, that is fine. Mr Gull?

Mark Gull: I think what we want is to maintain the integrity of the pension system. Smoothing has pros and cons, and particularly if you start smoothing at low rates, as we would now, you run the risk of just deferring some of the difficult decisions.

Chair: You are broadly agreeing with Mr Smith?

Mark Gull: Yes.

Q45 Chair: Mr Hyde-Harrison, I don’t think you are.

Mark Hyde-Harrison: I was going to try to clarify in the sense that we are very grateful that the Government has recognised the impact of QE on pension scheme deficits and is holding a consultation on looking at smoothing the discount rate. We think tackling the discount rate is the right way. Smoothing is one of the mechanisms, and one of the issues, which I think Ruston was making, is that if it only comes into effect for schemes with valuations in 2013, we are already at the point of very low interest rates after £375 billion of quantitative easing, and therefore many of the problems of smoothing are likely to arise. If you did not have the requirement that it will only come into effect for schemes that are about to undertake valuations over the next 15 months, smoothing might be more attractive to some schemes. You could look at the way in which it is implemented and it might become more attractive to certain schemes, but at the current position I think there is a danger that it will be too little, too late.

Q46 Chair: So, wariness about smoothing on several fronts: don’t wholly take it out of your kitbag, but considerable caution. Another way of introducing flexibility-you have hinted at it in the last reply you gave-would be to enable funds to have a longer time to correct a fund deficit, and I take it that would be the other main tool that you would want to go and talk to the regulator about?

Mark Hyde-Harrison: The main tool we prefer to talk about is putting an explicit allowance on the discount rate. The Bank of England’s own studies on quantitative easing have indicated that interest rates have fallen by about 1%. As you alluded to in your first question, it has had a beneficial impact on asset prices as well, so you wouldn’t be able to say the whole 1% impact of QE should be allowed on to the discount rate, but if you allowed half of that, around 0.5%, explicit recognition as the impact of QE on the discount rate and then removed that over time as QE was unwound, that would have an enormous impact in reducing pension fund deficits now. That would reduce the flow of money going into pension schemes, which is not in the real economy, but it would also help companies look more creditworthy and not see such large liabilities on their balance sheets that can hinder investment and other factors as well.

Q47 Chair: What I am hearing, and correct me if I am wrong, is, notwithstanding the fact that we are in quite exceptional and unique circumstances in the conduct of monetary policy, and therefore its effects on the pension industry, you are articulating great caution about any radical steps to address this on the grounds that we do not know where we are going to be in a few years’ time. You are concerned about the current situation, but you do not have a tool that you think should be implemented immediately, which you are confident will not have unintended consequences?

Mark Hyde-Harrison: The tool that we would be arguing for is that the Government give an indication to the Pensions Regulator to allow pension schemes, when calculating their discount rates under the gilts-plus approach, to have an explicit allowance for the effects of QE. That would be our very black and white-

Q48 Chair: Although you are acknowledging that working out what that is and-

Mark Hyde-Harrison: We would propose 0.5% as half-

Chair: Thinking through the implications of that, you are acknowledging that a good deal of caution needs to be used?

Mark Hyde-Harrison: You need a mechanism to unwind it. I think with what we are talking about and the reason why there always has to be caution is you are trying to balance member security on one side, that is members of pension schemes, and the economy on the other side and companies’ health. The belief is that a strong economy leads to strong companies and strong pensions and a weak economy and weak companies does not help pensions. Simply going for a funded solution in pension schemes can result, if it damages the economy, in them being less secure. There is a balance in there to be struck.

Q49 Chair: Is there anything that Mr Smith or Mr Gull would like to add before we move on to the second section? Yes, there is.

Ruston Smith: Yes, please. I would like to support Mr Hyde-Harrison’s remarks there. I think the key message is that we need to do something, and quickly. It needs to be flexible because some trustees of pension schemes will not wish to change their discount rates, but others may choose to. So I think it is important we do something that is flexible, not prescriptive, but is also very clear.

Q50 Chair: Which is not how I summed it up a moment ago, but I have now provoked a very clear message that I was not hearing a moment ago. Mr Gull?

Mark Gull: I do not have anything further to add on this point.

Chair: It is extremely helpful. Thank you very much for your evidence. If there is anything further you would like to add, please do so in writing. This inquiry on QE will take some time. It is a big and very important subject.

We would like to move straight on to the next panel, please.

Examination of Witnesses

Witnesses: Dr Ros Altmann, Director-General, Saga, and Simon Rose, Save our Savers, gave evidence.

Q51 Chair: Thank you very much indeed for coming to give evidence this morning. I saw at least one of you sitting at the back-perhaps you were both at the back-so you have heard what has gone so far, which is helpful. I will start with a question to both of you and start with you, Dr Altmann. Has QE been a tax on savers?

Dr Altmann: QE has been a tax on pensions. QE has pushed down long-term interest rates, which underpin the UK pension system. The lowering of short-term interest rates has acted more like a tax on savers. To the extent that savers save in pension funds, yes, QE has been a tax on savers. I do have concerns that the Bank of England has failed to recognise or properly quantify the possibly unintended side effects of QE that mean it has negative impact on the economy. So, far from being an expansionary policy, it acts like a tightening of fiscal policy, because it reduces the income of pensioners via any annuity purchases; it reduces the income of corporates, who have to put money into their pension schemes, rather than supporting their businesses; and it can reduce the income of pensioners themselves, because some companies have indeed failed because they have been unable to support their pension schemes and pensioners lose out in the PPF.

Q52 Chair: What we have just heard from the NAPF was that while they should be mindful of these distributional effects, it is for the Government to take policy measures to adapt, not for the Bank to alter its policy with respect to macroeconomic policy as a whole. Do you agree with that?

Dr Altmann: I believe that it should be part of the Bank of England’s considerations to properly assess all the consequences of its policies and, to the extent that its monetary policy actions may cross over the line to fiscal policy, I think it is part of the Bank of England’s duty to properly consider that. My fear is that so far the Bank has simply been in denial that its actions and policies have had these distributional consequences. If you read the analysis that was presented to the Committee, it indicates clearly that the Bank is saying its impact on, for example, pension funds has been broadly neutral. That does not stand up to scrutiny. It also suggests that its impact on defined contribution pensions has not been negative because the asset price rises that QE has supposedly engendered have offset the increased costs of annuity purchase. Again, that does not stand up to scrutiny and my evidence to the Committee gives tables and figures that will support that view and the Bank does not seem to have given its own estimate to support its view.

Q53 Chair: To the extent that QE could be considered fiscal policy, therefore, you are saying that they should take an active policy stance in response to distributional effects and therefore you disagree with the NAPF. Is that what I am hearing?

Dr Altmann: Yes. What I am saying is that it is important for the Bank to understand and recognise that its policy may be having this impact and then properly consider what the implications and impacts of those side effects are. My view is that the failure to appreciate how undermining pensions in an ageing population impacts on growth has meant that the distributional consequences of QE in themselves may be undermining the effectiveness of that policy. The models that the Bank of England has used and the groupthink that has been pervading the policy implementation of QE has failed to properly consider the possibility that the quasi tax increase impact of QE could mean growth is lower. What is supposed to be an expansionary policy has ended up in many sections of the economy as negative, as we have heard this morning, for example, but this morning did not mention the annuity market or the drawdown market, which is another very important area.

So a holistic view and a more open-minded view of what impacts monetary policy is really having, and the ways in which the UK economy may be in a non-normal state, which means that the academic models that predict certain relationships may not hold, should have been better considered. In the face of the evidence in terms of growth and in terms of what has been happening in the economy itself, I think it is disappointing that the Bank has not-certainly not publicly-explained how it justifies the view that pushing down long-term interest rates across the economy is expansionary in the face of the term structure of the private sector balance sheet in the UK.

Q54 Chair: Correct me if I am summarising incorrectly. You are saying that the Bank of England is now straying into an area that is quite highly politically charged and that it is not explaining itself adequately. I think that is pretty much the phrase you used a moment ago. Do you think the accountability structure for the Bank of England, therefore, is not robust enough, given its increased responsibilities?

Dr Altmann: I think that may be the case. Also I would like to say that I welcome this Treasury Select Committee inquiry. The operation of the Bank of England, which has had the significant quasi fiscal effects and distributional consequences, redistributing money from certain areas of the economy, such as either older savers or pension funds, to other areas of the economy, has happened without any parliamentary scrutiny so far and without any democratic debate. I think the oversight of the Bank of England should have been robust enough to challenge this one-track view.

Q55 Chair: I am going to apologise to Mr Rose for not having brought you in earlier but please-

Simon Rose: No, that is fine. Ros is more knowledgeable than me and I agree with pretty much everything she has been saying.

Chair: Okay, but now is an opportunity to qualify or add any points you want to. There will be other opportunities, but if you want to, please do.

Simon Rose: I agree. From the savers’ point of view, QE has been an utter disaster, whether they are saving through pension funds or saving through cash deposits. Not only QE itself and the lowering of interest rates, but, of course, inflation, which means that savers are suffering from negative real interest rates and unable to preserve the value of their cash. It is quite an appalling confiscation of wealth.

Q56 Chair: So QE is a tax on savers?

Simon Rose: Yes, undoubtedly. Like Ros, I don’t feel that they considered what the consequences were going to be for everyone at all. There is this obsession in the document with the rise in the price of assets, but very little consideration about income, both for savers and pensioners, and indeed for anybody. QE is an inflationary policy, as they admit, and, with inflation currently running higher than the increase in wages, it is not just savers and pensioners; it is everybody who is suffering and feeling the pinch.

Q57 Chair: There are millions of people out there worse off as a result of a disguised form of taxation. This is your view, yes?

Simon Rose: Yes. You can print money, you cannot print wealth. You get wealth from creating goods and services. So I don’t feel that QE has benefited the economy as a whole. What it has simply done is redistributed wealth and, as the Bank of England point out, 5% of Britons sold 40% of the assets, but in fact, using figures from the ONS Wealth and Assets Survey, 72% of the country’s net financial assets, and indeed also the nation’s private pension wealth, are owned by the wealthiest 20% of the households. So, effectively 80%, the majority of Britons, own only 20% of the assets and they have been losing out to the benefit of the very wealthy. It is increasing wealth inequality, which seems extraordinary.

Chair: We are going to come on to that in a moment.

Q58 Teresa Pearce: Mr Rose, who does your organisation speak for and can you describe the sort of people that typically would come to your organisation?

Simon Rose: Simply savers, savers and pensioners, but there are many people looking after pensions, so to a large extent we are speaking about cash deposits.

Q59 Teresa Pearce: Mainly older people?

Simon Rose: Yes, very many. The ones we want to help most are the ones who are perhaps least able to help themselves. We often get correspondence from people who feel that they had done the right thing, done without and saved to try to help support themselves in their old age, and are now finding that this is increasingly difficult.

Q60 Teresa Pearce: From what has been said to the previous questions, what I am hearing is that you think one of the results of QE is to erode the culture of savings, because people have saved and now found that it is not worth anything?

Simon Rose: Every week we get messages from people saying they have saved and they now feel they have been taken as a mug, they have done the wrong thing. They wished they had racked up debts instead. So the present generation are feeling betrayed, but I am worried what it means for future savings as well.

Q61 Teresa Pearce: It is interesting that you mention that. One of the planks of Government to come in is auto-enrolment into pensions, which is to change future behaviours so that pensions are not just for people above a certain income; they will be for everyone. That is to get people to take responsibility for their future, to ensure future generations do not have pensioner poverty, but people can opt out. Do you think what is happening to pensioners now, particularly with annuities and drawdowns, will increase the number of people who will opt out of auto-enrolment?

Simon Rose: I hope not.

Teresa Pearce: No, I hope not.

Simon Rose: I think what the DWP is doing is admirable.

Q62 Teresa Pearce: But do you think that could be an unintended and unconsidered consequence of quantitative easing?

Simon Rose: To some extent, yes, monetary policy is working against what the DWP is trying to do, I am afraid.

Q63 Teresa Pearce: Dr Altmann, do you have a view on that?

Dr Altmann: Yes, I do have serious concerns that the prolongation of this period of exceptionally low interest rates at the same time as inflation is overshooting will undermine the willingness and ability of many people to save for their own future, which is an aim of another area of Government policy. I do take the point that at this stage in the economic cycle, given where the economy is, the Government may not be very keen to see too many people save because it wants to keep spending going to boost the economy. But I would argue that there is this generational divide at the moment whereby what the stance of monetary policy is doing is putting younger people off saving altogether, because they really don’t see the point, but those coming up to or approaching retirement feel very stuck and, in fact, they are not doing what the Bank of England would have expected them to do, which is to stop saving and go out and spend more because it is not worth saving. Actually, fearing for their financial future, they are increasing their precautionary savings. So what QE and ultra-low interest rates have done is hamper the spending power of the groups in the population who are not over-indebted and who would otherwise spend, because they are worried what is coming next. They are cutting spending.

Q64 Teresa Pearce: Are you saying that quantitative easing has devalued the grey pound?

Dr Altmann: Unquestionably. If you are talking about the role of pensions, there is no question. By forcing down long-term interest rates in a pension system, whether it is defined benefit or defined contribution, that is underpinned by gilt yields, forcing down long gilt yields devalues pensions, which devalues the spending power of older generations. It also impacts on the ability of the corporate sector, who have been supporting some legacy pension schemes, to keep spending. Those are elements of the policy that seem to have been completely overlooked, and of course the Bank of England’s models will not factor those in.

The other difference that is important to recognise is the classic economic method for QE to work has broken down because of the particular circumstances of the UK economy, which are not the same as the US and a lot of academic models are based on how the US economy responds. US households typically have borrowings that are more related to long rates. The banking system is more dis-intermediated over there. Mortgage borrowers, for example, can refinance at long rates, so if long rates fall in the US that can help affordability of mortgage rates. In the UK, mortgage rates are set by base rates, short rates, so forcing down long rates in the UK does not have that same impact on borrowers. If you have a heavily over-indebted consumer borrowing sector, which we clearly do have, then making borrowing easier for them does not have the normal predicted impact, which is they will go out and borrow more and spend more, because if they are already so heavily in debt what they say is, "I have to try to repay my debt and hunker down a little bit."

That section of the population that is benefiting unquestionably from monetary policy is not spending more because they are in such an impaired position they can’t. The section of the economy that does not have these huge debts, who were spending and could spend more if they felt more confident, have also cut spending because they fear for their financial future. What QE, at best, may do is stabilise things at a very low level, but it is not a policy that produces growth. Could I please just make clear that I am speaking in a personal capacity, not as a representative of any particular corporation, Saga or-

Q65 Mr Newmark: Can I pick up on your last point there? I am going to back up to some other stuff you were saying. You were saying that QE does not help growth, but surely by keeping interest rates low it will help corporate economic activity. It is not all bad. I am going to focus on the unintended consequences of some of the good stuff the Government is trying to do, or rather the Bank is trying to do. There must be some benefits to QE in that sense.

Dr Altmann: Yes. In my supplementary evidence to the Committee, which I hope you have received, I have gone through the positive effects, the negative effects and the traditional economic models, what they predict and why they may not work. The positive effects of QE that I would identify are that it obviously lowers long-term interest rates across the economy and it has enabled large corporates to borrow at very low rates. So there are some companies, particularly those that do not have defined benefit pension schemes to support, who will have benefited significantly from the ability to finance at low rates. Large companies are flush with cash, but of course they are not spending it, so we have to perhaps explore a little bit why.

The UK has benefited from QE in so far as the fiscal deficit can be financed at much lower rates, so the UK Government has benefited from QE and that is where there is a clear straying of monetary policy into the fiscal area as well. Of course banks have benefited significantly from QE because it has helped them recapitalise their balance sheets to the extent that they make markets in financial assets, particularly gilts. They will have earned fees on both sides of the deal as the Bank of England sells gilts and buys gilts. So those areas of the economy will have benefited; the wealthy top 5% of asset owners are likely to have benefited from QE.

Q66 Mr Newmark: You missed out an important group there: 60% of people in this country, I think, are homeowners, they have mortgages-

Dr Altmann: QE does not impact-

Mr Newmark: It does because ultimately it keeps interest rates fairly low, so they are also benefiting from that as well.

Dr Altmann: QE impacts long rates, but UK mortgage borrowers borrow at short rates. It is base rate-related or floating rate borrowing. That is what I am trying to say. I think the term structure of the private sector balance sheet has been overlooked. In the US, yes, pushing down long rates will help people who are borrowing for mortgages, so there is a more direct consequence and a more direct beneficial impact. In the UK, pushing down long-term interest rates doesn’t directly benefit those with mortgages. I suppose you could argue that indirectly it helps house prices stay at a higher level than they otherwise would.

Q67 Mr Newmark: The yield curve as a whole, I think, has come down as a result of this. There is a body of evidence that says that.

Dr Altmann: The reason we have QE is because short rates had come down as low as possible so you had to do something if you wanted to keep reducing rates. My argument is that it may be that a much more expansionary stance of monetary policy would be achieved by a more steeply sloping yield curve where you do not depress the long end because that has all these negative effects.

Q68 Mr Newmark: Basically, because I appreciate we do not have much time, what you are saying is the positive benefits of stimulating corporate activity-keeping, effectively, UK taxpayers ultimately paying a lower amount of taxes because there is lower interest the Government is paying and so on, and I would argue also mortgage holders benefit-do not outweigh the negative impact it is having on pensioners. Is that what you are saying?

Dr Altmann: Look at the economic evidence. We have not had a recovery.

Mr Newmark: I can see Simon wants to say something here.

Simon Rose: Ever since, I am afraid, you asked the question. I would like to challenge this because it seems very rarely challenged-this idea that somehow the economy will be better off if we have lower interest rates. Suppressing the price of money artificially does not necessarily benefit an economy. If that were the case, why do we have interest rates at all? If you suppress the price of something, it is no surprise it is the supply that diminishes. As Ros was saying, companies have large cash balances so perhaps they would be better off with higher rates. We have heard from building societies that say they can’t function properly with really low interest rates. You have a body of savers in the country who are desperate to lend money, you have people who want to borrow it, so at this level of interest rates it is not working.

Q69 Mr Newmark: I hear you. What you are saying is that there is no point in the Bank of England continuing to try to drive down interest rates with more QE and so on and so forth because the real issue is confidence? What the Government, what the Bank of England, should be thinking about is, how do we bring confidence back in the system, because knocking another 25 basis points off interest rates is going to have no benefit, it is not going to help the £750 billion on corporate balance sheets to get them to start spending their cash on investment?

Simon Rose: I believe it is gumming up the economy rather than helping it.

Q70 Mr Newmark: There is one point that was made, which was that the Bank claims that the over-65s are the only group that have been able to maintain positive consumption growth during the crisis. This is really to Ros. Would you agree with that statement by the Bank?

Dr Altmann: No, not at all. In fact, the evidence is quite the contrary. I have done quarterly surveys since 2010 asking the over-50s what they are doing in response to the financial position they find themselves in. Consistently, every time they say, "We are cutting spending." If you look at the consumption figures, if you look at the spending pattern, that is borne out by the evidence. My concern here is that we have a policy that feels good short-term. It is a kind of political palliative; it is trying to suggest that we can sort everything out by bringing long-term interest rates down and it is ignoring the longer term consequences that are starting to come through and have not been properly considered. We haven’t talked about the distortion of the supposedly risk-free interest rate, which is fundamental to all asset markets. Asset markets are priced relative to the supposedly risk-free rate. The Bank of England has distorted that risk-free rate. It has arguably created a bubble in the gilt market. It does not seem to know-and nobody knows-what will happen if and when long rates normalise. But usually with markets, if they are artificially depressed on the way down, they snap back far more on the way up.

Mr Newmark: Well, if they normalise they will go up, is what will happen.

Dr Altmann: But they might go up a lot more than if we had not had this distortion in the first place. The first round of QE one could understand; if the economy is in a desperate situation it is worth trying something unconventional and experimental. But I think keeping going in the face of evidence that it was not working-

Q71 Mr Newmark: I can feel vibrations coming from the Chairman here. So you are looking forward to Mark Carney focusing on growth versus inflation because you think that maybe will change the dynamics, or you don’t think so at all? You are not even looking forward to Mr Carney coming in?

Dr Altmann: I have no preconceived ideas about what Mr Carney may or may not do. What I am trying to-

Chair: Neither do we. I am going to move on if I may.

Q72 Andrea Leadsom: Dr Altmann, would you say that there are other policies that the Bank of England could have followed instead of QE that would have been more effective and, if so, what? At this stage, what do you think would be the impact of further QE and do you think that there are other policies the Bank of England should pursue instead of QE at this stage?

Dr Altmann: I certainly believe that there are other policies that the Bank of England could have pursued and one of the things that disturbed me so much reading the Bank’s paper that it submitted on the distributional consequences of its policies was that its conclusions rested on the assumption that there was no other policy but buying gilts, that there was nothing else anybody could have done to try to stimulate the economy apart from buying gilts. That clearly does not stand up to scrutiny. You can create money and do other things with it. Buying Government bonds, as I have tried to explain, is not automatically an expansionary policy anyway. The problem we had in the economy-and we still have, arguably-is that there are sectors of the economy that need money who can’t get access to it. Whether the banks are not lending to them or the banks are refusing to lend on terms they can accept, there are lots of small and medium-sized businesses who are not getting the money that they need to expand, to create jobs and growth. If we need to get money to that sector of the economy, it is not clear that buying gilts is the way to do it. That is a very indirect mechanism. It relies on an impaired banking system to recycle new money towards the very areas that have been neglected by that banking system, and it certainly does not seem to be happening. More direct use of newly created money would have been, in my view, more stimulatory.

Q73 Andrea Leadsom: More direct, straight into businesses as opposed to into the banks?

Dr Altmann: Exactly. A helicopter drop would have been far more effective than buying gilts and probably have less dangerous negative side effects, to be quite frank. If you are going to be unconventional, let’s be direct.

Q74 Andrea Leadsom: Like a tax rebate or something of that sort?

Dr Altmann: Exactly. Creating a fund to underpin investment by groups that have large amounts of money but are currently either not spending it or chasing gilts, such as pension funds, would have been a productive use of new money in the economy. At the moment what we have is this vicious spiral-I call it a bit of a death spiral-with pension funds who have billions of assets but not enough to cover their ever-rising liabilities, which are mark to market at ever-decreasing gilt yields, trying to de-risk, and the conventional way they are supposed to de-risk is to buy gilts. So the Bank of England is buying gilts, forcing pension funds to buy gilts rather than using that money that they have, the billions of pounds set aside for long-term payments, to directly stimulate the economy. Harnessing the power of that money to invest in infrastructure, construction projects, direct lending to small firms, with an underpin from the Government via the mechanism of QE would be a direct way of helping growth. Creative ideas like that don’t seem to have been introduced, although I think there is consideration of that happening now.

Andrea Leadsom: Now, under Funding for Lending.

Dr Altmann: But I think it is urgent that we help pension funds and their advisers understand that buying gilts at these levels is not necessarily de-risking and may not be serving their members’ best interests in the long run, even if it feels that it must be the right thing to do in the short run. Pension funds are long-term investments that are being distorted by QE in the short term because of the requirement to mark to market the present value of their liabilities.

Q75 Andrea Leadsom: Can I ask you about the unwinding of QE? What do you think the implication will be of the Bank of England’s own proposal that you have heard-where they raise base rates by quarter of a percent and then sell gilts back into the market-in terms of distributional impact on the economy?

Dr Altmann: I don’t think anybody can quite predict what will happen here because we have never had the distortion of the gilt market that we have now, so this is unprecedented territory.

Q76 Andrea Leadsom: What preparation should the Bank of England be making? The Governor argues that this is just a monetary policy intervention like any other and that there is nothing special about it so that by selling the gilts it will merely have the impact of raising the base rate. That is his view

Dr Altmann: I think the Bank has also relied on the view that the gilt market is very liquid and therefore if you sell lots of gilts in the market it won’t really matter. Equally, I think their view was that buying lots of gilts on the way up did not really distort the price because there are lots of other reasons-and it is true-why UK interest rates might have been falling. But I think the Bank has significantly underestimated the extent to which long-term interest rates in the UK have strayed away from the fundamentals. If you look at inflation, if you look at the fiscal deficit, it is quite clear that the current level of long-term interest rates in the UK does not fit the fundamentals. At some point the market is likely to focus on those. The reason perhaps that it hasn’t yet is that it expects the Bank might still come in and buy a lot more gilts and does not want to get caught short. If or when the Bank signals that it will no longer be conducting any further QE gilt purchases, there is a significant danger that there will be a sharp upward spike in gilt yields and that could have knock-on consequences for other asset markets as well.

The Bank has put itself in a very difficult position because if it announces that it is not going to do more QE it risks a spike upwards in gilt yields. In a way, the best strategy might be for the Bank to continue to keep the markets guessing as to whether it might do more QE while actually offloading some. But I don’t know if they have been working on that type of strategy.

Q77 Andrea Leadsom: They had the opportunity under the Treasury taking the coupons. They could have decided to offload a tiny bit-

Dr Altmann: I was disappointed with that, I must admit.

Andrea Leadsom: Just to test the market, but they didn’t choose to do that. In terms of if there is a cost to the taxpayer of the unwind of QE as a result of the fact that the portfolio may be worth less than, overall, it was purchased at, do you think that history should examine the issue of leakage-the fact that in purchasing gilts there was potentially leakage outside of the UK, so not expanding our money supply at all, but those of other countries? Do you think there is a potential carelessness in the way that the policy was implemented?

Dr Altmann: I would concur with that and I am also on record as having said I think history will judge this as a monumental mistake. It is understandable why there were short-term reasons to try the policy, but to continue in the face of evidence of the weakening of the economy, in the face of scant evidence of any benefits of QE other than forcing down the yield curve-but the policy aim is not directly to do that. The policy aim is supposed to be to have a wider impact on the economy, but the transmission mechanisms for the impact of forcing down long rates seem to have broken down. There are, as I have put in my paper, significant reasons to believe that those transmission mechanisms have not worked, and indeed in some ways may have had the opposite of the intended effect.

Chair: I am going to move things on now, partly because we are quite short of time. We have Treasury questions coming very shortly on the Floor of the House and three more colleagues want to chip in with quick questions.

Q78 Mr McFadden: I want to ask about the distributional impact. Any saver who has, for example, stocks and shares ISAs will have seen the value of those higher as a result of QE, will they not?

Simon Rose: Yes. Value assets have gone up, yes, but the majority of savers do not.

Q79 Mr McFadden: Any pension fund that invests in equities will have seen that proportion of the pension fund that is invested in equities with a higher value than it would otherwise have been as a result of QE. Is that the case?

Simon Rose: Equities have gone up, yes.

Dr Altmann: Only the assets though, not the liabilities.

Q80 Mr McFadden: In terms of pensioners living off income from savings, I just want to explore the proportions on this. I would have thought most pensioners live off either their state pension plus pension credit or state pension plus an occupational pension, if they are fortunate enough to have one of those. What proportion of pensioners are living off neither of those, but purely on income from savings? It must be quite small.

Simon Rose: According to the National Pensioners Convention two or three years ago, they said 5 million pensioners were relying on cash savings for at least half of their income.

Q81 Mr McFadden: Five million pensioners are relying on cash savings for at least half of their income. So that would be income in addition to the state pension and it is that proportion of their income that you are particularly concerned with?

Simon Rose: Yes.

Q82 Mr McFadden: The Bank of England has been fairly clear that most of the benefits from this policy have gone to the top 5% of households. They estimate that they hold around 40% of financial assets. What do you think the right response to that should be? Do you think there ought to be a policy somewhere in this mix of fiscal and monetary policy that is targeted at the asset poor rather than the asset rich?

Simon Rose: I don’t know how you would do that. People who have lost out I am sure would be very happy if they could benefit in some way now, but how that would be done I am afraid I could not possibly say. How do you identify those people?

Q83 Mr McFadden: I am talking about people that don’t have large savings, don’t have financial assets. I think the median amount of financial assets that is cited in the Bank of England’s report is £1,500 per household, so most households don’t have a lot of these savings.

Simon Rose: No, that is one reason why the policy is so iniquitous.

Dr Altmann: And 90% of savers hold assets with less than two years maturity, so that is a significant indication of the skewed nature of the holdings of private sector wealth.

Q84 Mr McFadden: The Bank says those people have been hurt more by the cut in interest rates, in the bank rate, rather than-

Dr Altmann: Which is what I said at the beginning, yes.

Simon Rose: Although in saying that, the Bank seems to be ignoring the effects of inflation, of course.

Q85 Mr McFadden: Explain that?

Simon Rose: They talk in the document about how savers have been hurt by the cut in bank rate. Yes, that is true, they are getting lower interest rates but at the same time, partly as a result of this policy, inflation is higher than it otherwise would be. As a result, these people are losing money because they are in negative real interest rates. The Bank chose not to mention that.

Q86 Mr McFadden: What are you arguing for here, in the end? Do you think the Bank should put up interest rates to help savers?

Simon Rose: As it happens, I think the Bank should eventually put up interest rates to help the economy, not just savers.

Q87 Mr McFadden: You say "eventually". We are in this period of very flat growth that we have been in for several years. Do you think in the current circumstances the Bank should put up interest rates?

Simon Rose: Yes. I believe at the moment low interest rates are leading to a zombie economy.

Q88 Mr McFadden: Dr Altmann?

Dr Altmann: If I can come back on some of the issues that you raised, because I think you have raised some really important areas. The first one is the indication that pension fund assets will have gone up, therefore the policy is broadly neutral. The traditional relationship is that a 1% fall in long-term interest rates would typically lead to a 20% increase in pension liabilities for a pension fund with around a 20-year duration and a 6% to 10% increase in pension assets. So, if those relationships hold, and there is strong evidence that they do, it is automatically evident that pension fund deficits will increase. Notwithstanding the fact the assets may have gone up, liabilities will have gone up more.

Mr McFadden: I was asking purely about the proportion that was invested in equities. I was just trying to establish there were some mixed effects.

Dr Altmann: The other point that I think is important to make is that there is not an automatic mechanism by which lower long-term interest rates push up equities. These are two separate markets. There is a relationship, clearly, and there are other factors that will impact on equity markets. What we have seen over many periods is the extreme volatility in asset prices. So you cannot rely, as the Bank seems to want to do, on assuming that because long rates have gone down pension fund assets outside gilts will automatically have increased, and indeed there were periods that-

Q89 Mr McFadden: Do you concur with Mr Rose that it is time for interest rates to go up, it is time for the bank rate to go up?

Dr Altmann: I am arguing that there would be a more expansionary stance of monetary policy if the yield curve was steeper, which means that-

Q90 Mr McFadden: I do not know if that is a yes or a no. Do you think they should go up?

Dr Altmann: I think long rates need to be higher than they are. But I also would like to make the point about annuities, which has not been mentioned so far and is very important because over 400,000 people every year buy an annuity in this country. That is how a defined contribution pension scheme gets its pension income. Annuities have increased in price by 20% to 30%, so that means any pensioner who has converted into an annuity over the recent period of QE will be permanently poorer as a result. The bank says these impacts will wash out over the cycle. For someone who is locked into an annuity, that is it.

Q91 Mr McFadden: I understand the point, but let me try a third time on the base rate. Do you think it is time for the base rate to go up?

Dr Altmann: I think that would be a dangerous thing to do right now. I think signalling that the Bank is re-evaluating the impact of the term structure of the UK private sector balance sheet and the impact of monetary policy because of the specific nature of the factors in the UK economy would be welcome. I do not think anybody quite knows, because we are in such a unprecedented situation, what a particular stance of policy will do. The need for long rates to rise I think is clear, but the danger is that because we have artificially depressed them so much the rise will be much more difficult to control.

Q92 Chair: But you are saying we have to take that risk anyway, aren’t you, Dr Altmann?

Dr Altmann: Ultimately it will happen. Either the markets will force it or the Bank of England will do something to force it.

Q93 Chair: So you are saying we need long-term rates to rise now, but it is too dangerous to move short rates. Is that your view?

Dr Altmann: I think one would need to be very careful about raising short rates precipitately now.

Q94 Chair: Okay, that is repeating what you have just said. But I have summarised your view correctly?

Dr Altmann: Yes.

Q95 Jesse Norman: Thank you, Dr Altmann and Mr Rose, for your focus on short-term and long-term rates. Of course, if you want a positive yield curve, then short-term rates will have to be anchored at low rates while long-term yields are allowed to drift up. Dr Altmann, in your comment you said that gilt yields would rise if QE was not continued or was going to be unwound. Does that mean that you think that gilt yields are not just a function of an international or national judgment on economic activity; there are lots of specific reasons why long-term gilt yields are the level they are?

Dr Altmann: Yes. I think gilt yields have been artificially distorted and the long rate has been artificially depressed by the Bank of England buying about a third of the market. It does not take much economic modelling to suggest that if you buy a third of the market of an asset you are going to distort its price.

Q96 Jesse Norman: So it is not simply a judgment about the Government’s policy or economic prospects of the country? There are specific reasons why those yields are low?

Dr Altmann: There are specific reasons why those yields are low. Clearly there are other factors apart from QE, but I don’t think one could possibly argue that the existence of QE is not responsible for the fact that we have had a dramatic decline-

Q97 Jesse Norman: That is helpful, thank you. Do you share the view that has been offered that there is something slightly ironic about the Bank’s position? The bank has said it does not wish to buy corporate assets because that would amount to either picking winners or usurping democratic decision-making, yet it is engaged in a policy that is highly discriminatory between winners and losers, including whole segments of the population.

Dr Altmann: Yes. I think the Bank has not understood, maybe, the distributional consequences of what it has done. If the Government were to stand up in Parliament and say, "We have decided the economy is in a hole and we have to take away 10% of income from older people, from savers and from pension funds, and we have to give that money to the banks and to people who have borrowed a lot to be able to afford their borrowings more," Parliament could debate that and we could decide whether there is a valid case for redistributing income from older people to younger people, from middle asset owners to the very wealthiest. We have not had that and this Committee is starting to do it.

Q98 Jesse Norman: When we first questioned the Bank about this, their line was, "We were in an emergency and this is good for growth," and so on. Do you think the emergency has now sufficiently passed to start a proper re-evaluation of this policy? Would you accept the view that has been suggested that if you continue to pretend these things are an emergency then you are making a political judgment? You are smuggling a political policy in under the guise of monetary policy because you are sustaining an emergency response at a time when emergency conditions do not exist?

Dr Altmann: I don’t see that we are in an emergency condition. If you look back to 2009 the reason given for trying quantitative easing was to avoid deflation. That was the original remit and the Bank of England’s forecasts were that we faced a Japanese-style deflation. Having overcome those risks most clearly, the Bank continued with its policy of QE and it has not given a clear explanation of why there is a need for further QE if its remit is indeed inflation targeting.

Q99 Jesse Norman: Mr Rose, would you like to comment on any of that?

Simon Rose: That is right. The Bank of England’s own booklet on QE talks about this, reducing the risks of inflation falling below the 2% target. If inflation looks set to rise above 2%, the MPC could put downward pressure on spending and inflation by raising bank rates, removing the extra money. It has been above 2% for 39 out of the 45 months since QE began.

One thing I would also say about savings, if I may at this point, is the importance of savings not just for the people who own the savings, but for the economy as a whole. The Bank seems to underrate this considerably, but our savings provide the money for investment that enables the economy to grow. Undermining savings, not only for this generation but for future generations, which we heard might be the case, risks decapitalising the country, being unable to maintain our capital stock and unable to grow it. It is extremely dangerous and I am glad the Committee is looking into this because I do not feel it is aired enough. The Bank of England seems to get a free run on this.

Q100 Jesse Norman: Isn’t the difference between this recession and previous recessions precisely that people have not been thrown out of their homes in the same way and those knock-on effects have not taken place precisely because there has been an easy money policy?

Simon Rose: That is true, but you could argue to some extent that ameliorating the effects of the recession has been a form of pain relief rather than of cure and that perhaps to have seen a little bit more in the way of companies that are now being kept alive by forbearance from the banks, for instance, might enable other companies who can’t currently get finance to have started up-

Q101 Jesse Norman: Presumably also transfer from the next generation to this generation?

Simon Rose: Yes.

Dr Altmann: Maybe I can characterise it as follows, and you could compare it a little bit with what is happening to pension funds. What the Bank seems to be doing is concentrating on protecting the downside, but you are not going to get out of the hole unless you find the upside. With pension funds, buying gilts may stop you getting worse, although it hasn’t, but it does not give you the returns you need to make up your deficit. With QE, by helping banks rebuild balance sheets or borrowers afford loans that would otherwise be unaffordable, you don’t get growth. So you have looked at the negative control bits, but there is nothing coming through from the Bank that says, "This will create growth," and it hasn’t created growth. The evidence is clear. I believe that ending QE is much more likely to herald a period of growth and I would predict that if we do not have any more QE the economy will be much freer to grow than if we do.

Chair: That is admirably clear. Both of you have given very forceful advice to us on this important aspect of the whole QE question of the distributional effects, and we are very grateful to you for coming this morning to do that. This is just part of a much wider inquiry that we are holding into QE and we will be bearing in mind what we have picked up this morning as we take that inquiry forward. Thank you very much indeed for coming.

Prepared 8th February 2013