The Bank of England and the Government need to be imaginative with their policies

The pension funds’ unwillingness to sell is frustrating the Bank’s attempt at unprecedented monetary expansion and, thus, the authorities’ wider ambition to support the economy during the slowdown in growth after the EU referendum

The Bank of England (Getty)

Who’d have thought that printing money could be so difficult?

The Bank of England’s bold policy of buying government debt with cash, designed to inject more spending power into the economy, has run into a slight problem. The pension funds, who own large quantities of these gilts, do not wish to surrender them, or at least at the prices the Bank is offering. The pension funds rely on them to provide a steady guaranteed income stream with which to pay the nation’s retired people. Nothing, in their view, is an adequate substitute for these assets. So they aren’t selling. It is frustrating the Bank’s attempt at unprecedented monetary expansion and, thus, the authorities’ wider ambition to support the economy during the slowdown in growth after the EU referendum.

The Bank’s efforts have already pushed the price of these bonds so high that the yield on them has turned negative, meaning that pension funds are faced with having to pay HM government for the privilege of lending it some money. It is the starkest and by far the most significant example of the damaging effect the Bank’s ultra-loose monetary policy is having on the nation’s savers. The Governor of the Bank, Mark Carney, like his predecessor, Mervyn King, proffers concern about the returns on deposit accounts, but maintains the policy in the wider interest of the economy, pointing out that the equities and bonds that form the bulk of pension pots have benefited from that support and are worth more than they otherwise would be. So savers do, in fact, get something out of the Bank’s policy.

Even so, the particular problem with occupational pension funds linked to final salary schemes is that the shortfall in their projected future income through ultra-low rates has to be made up by the companies themselves. Some are in a poor position to do so, and the emerging danger is that more of these schemes will, in effect, be dumped on the public sector as the parent companies have to walk away from an unsupportable obligation, or are dragged down by it. As we have witnessed with the former British Steel and BHS pension funds, these are considerable additions to the public sector, and, should monetary policy have to continue in this line for many more years, we could see a much larger effective nationalisation of the occupational pension sector.

One answer could be to tilt the Bank’s policy away from gilts and towards buying other, private sector, debt. The Bank is committed to buying some £10bn of company bonds, against the £70bn UK gilts programme, and there is no reason in principle why these proportions could not be reversed. There is, of course, a risk of default or devaluation with any corporate debt, but that does neglect the risk that the value of UK government bonds have consistently been depreciated by inflation – ironically the very result the Bank is seeking to achieve as it pursues its longer term inflation target.

A second possibility may be for the Bank to purchase more gilts as they are issued by the Government, rather than waiting for them to turn up on the balance sheets of institutional investors. These bonds could fund the major investment in infrastructure that virtually everyone agrees is essential to underpin the economy in the short run and to boost productivity in the longer run. The Bank and the Treasury have shown imagination before in the implementation of policy, and could do so again. In any case, the Bank should keep on with the policy.