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The UK government’s Quantitive Easing £435 billion programme is currently considered a successful solution to the 2008 bank default and stock market crisis.

The government created new money to buy government bonds. Added to near zero interest rates this has been perceived as a boost to the real economy, growth and jobs, while reducing debt issues.

But with every action there are repercussions, what might these be? and how might these feed into your investment planning?

QE relies on artificially lowering bond yields, especially on sovereign debt. This has the knock on affect of increasing the value of alternative asset classes, such as equities and house prices. It also facilitates fiscal deficit financing.

How has QE affected pensions?

QE has sharply increased company pension deficits. The substantial rise in liabilities due to the lowered bond yields has significantly increased pension liabilities and all but done for DB pensions (otherwise known as Final Salary pensions). Very few of these types of pension remain open to new members, some have gone bust, and some have closed altogether.

Companies have paid billions into their pensions to address benefits, billions not spent on reinvesting within the company (the lifeblood of any company). QE has negatively impacted big companies with DB schemes.

Has the artificial (wrong word as what can be defined as artificial in the financial world?) increase in the value of equities and property made them more volatile?

Pension companies are supposed to match liabilities with fixed interest securities, so, pension companies now have poor performing investments due to the low bond yields and the fact that they have (as an industry) reduced the equity component of their investment portfolios from 60% to 30%. Pension companies are competing with the government to buy bonds which drives yields lower still. Is that a vicious circle?

Falling bond yields has lowered annuity returns, making an annuity a very unpopular choice for a pensioner, a £100,000 pension fund would have generated an annual income of £7,900 in 2008, now it would generate £5,000 (a 36% fall).

Have there been other consequences such as reduced wages? Resolution Foundation claim workers are paid £200 less due to pension deficit repayments made by companies.

Have the rich got richer due to increased property and equity values? Over 45's hold 80% of assets, is the disparity between young and old increasing?

Higher house prices have increased rents for the young and poor, meaning they have less disposable income.

Has QE led to populism? Was BREXIT an example of populism?

Interest rates on credit cards, overdrafts, and standard variable-rate mortgages have not fallen in line with the lowering of interest rates. So overall, has QE helped the majority?

Can the market withstand the next phase of QE, which in theory could mean the selling back into the market of trillions of dollars worth of bonds (as QE is being used elsewhere). Or, the government could just allow the bonds to mature, effectively monetising fiscal policy. How is this any different from a banana republic? that of printing money to avoid troublesome economic periods. Is QE just a fancy name for a banana republic?

My opinion is that QE is an interesting solution to a difficult problem. The option was to allow there to be a lack of money within the financial system which would have ground activity to a halt and brought with it it’s own set of problems. If the bonds the government bought back are allowed to mature (and effectively disappear) then a tricky economic period was helped by injecting liquidity into a faltering system, with a premium being paid on the bonds to buy them back, but then there is still the issue of the effects of the money printed to buy these bonds, who truly benefitted from this money? the vendors of the bonds.

There are a lot of knock on effects of what amounts to a colossal artificial manipulation of the markets. Many knock on affects are unknown and will play out at unexpected and unpredictable moments. Where have unnatural imbalances formed? how will these correct? when will they correct? and what effect will their effect be on the investor?

I personally keep my money invested in multi asset funds, relying on fund managers to use their knowledge and expertise to diversify investments into a multitude of different markets and regions of the world, de-risking my investment while still receiving the benefits of a superior returning asset class (equities). One of the ways I add value is by choosing the best multi asset funds to invest in.

I am also a believer that equity markets absorb and reflect (albeit with volatility) all considerations affecting the global economy, so, if you want protection from inflation and benefit from company growth/profits from around the world then the way to do this is through investing in equities.


While we keep information on the website as up to date and as accurate as possible, the information on this website does not form part of our advice process. Cambridge Pensions Ltd cannot accept any liability for any decisions made by a client or member of the general public based on any information contained on this website. The value of your investments can go down as well as up and you may get back less than has been paid in.

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