Many pension funds have also moved toward defined contribution schemes. As Draghi himself recently acknowledged, this shift may undermine the very purpose of QE —to strengthen demand and increase inflation. Low yields have boosted the value of European assets, shares, and real estate. However, as insurers and pension funds pass investment risk on to their customers, those saving for retirement particularly those nearing the retirement age, a rapidly growing demographic in Europe will find that the shortfall in investment income caused by low rates leaves them with insufficient retirement income.
Either way, consumption levels will be reduced; the opposite of what QE is meant to achieve. Draghi has thus far shrugged off these concerns, stating that abandoning QE would be even worse for pension funds, insurers, and the Eurozone economy. Other supervisors across Europe, however, have woken up to the dangers of persistently low interest rates: last month, the European financial supervisory authorities ESAs in a joint report rated low yields among the greatest threats to financial stability.
The French supervisor ACPR recently announced a beefed-up stress test of the effects of low interest rates on insurers and the OECD has called for more supervisory flexibility. Therefore, we need to find ways to restructure these debts. A sensible way forward would be for the lender to take an equity stake in the property, rather than forcing the borrower out and trying to sell.
House prices are too high, if they do fall that can correct some of the other imbalances in our economy. Overall, these latest figures should be a wake-up call to policymakers, to highlight that the current stance of policy is not working well enough and we need to find more creative ways to stimulate growth. There are routes available, especially if we can harness the power of pension assets rather than relying on the banking system. We also need to understand the importance of the spending power of older generations - rather than taking money away from them, either via low interest rates or high inflation, we should be ensuring they remain confident enough to spend.
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Choose your subscription. Trial Try full digital access and see why over 1 million readers subscribe to the FT. McPhail says: "All other things being equal, we would expect a further fall in gilt yields following an announcement of additional QE, and in a short space of time this would be expected to feed through into lower annuity rates. This means the assets within the funds are less than the funds' liabilities — the incomes they have to pay out to present and future pensioners.
McPhail says any fall in gilt yields is likely to exacerbate their deficit problems, adding: "According to the PPF, a 0. This can only increase pressure on final salary schemes at a time when those in the public sector are already undergoing substantial changes and those in the private sector are being closed down altogether.
Joanne Segars, chief executive of the National Association of Pension Funds, said: "Pension funds are deeper in the red than ever, and this extra dose of QE is only going to make things tougher.
Our fear is that many will choose to close these pensions altogether, further weakening the UK's ability to save for its old age. The Bank's own research shows that QE is harmful to the majority of final salary pension schemes, particularly in the short term.
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