Carney charms MPs (once they get over his pay)

The next BoE governor reveals his plans for expectation management, but stays firmly conventional.

Against a background of the Bank of England's monetary policy committee deciding to keep interest rates flat at 0.5 per cent for another month — meaning it has now been four full years since the last rate change — the next governor of then Bank of England, Mark Carney, appeared before the Treasury select committee and and gave some of the first hints as to how he plans to run the country's central bank.

Of course, before he could do that, he had to justify his pay to the assembled MPs. Admittedly, Carney will be payed a lot: £480,000 a year base salary, plus a £250,000 "housing allowance", well above his predecessor Mervyn King's £305,000. But he defended his salary by pointing out that "I'm moving from one of the least expensive capital cities in the world – Ottawa – to one of the most expensive capital cities in the world," and by noting that his pay was in line with the outgoing head of the FSA, whose responsibilities are being merged with the Bank of England's.

David Ruffley MP was behind him, at least:

On the question of pay, you will be paid considerably less than recent England football managers and I think you are likely to have more success than them.

Eventually, Carney was allowed to talk about monetary policy, and revealed that, while he isn't going to be the loose-cannon central banker of our dreams — NGDP targeting and helicopter drops are out of the question — he does plan to be somewhat more aggressive than King.

In Canada, where Carney was the head of the central bank before his appointment here, there are formal reviews of the inflation target on a five-yearly timeframe. Here, by contrast, the target is — and has been since it was introduced fifteen years ago — for inflation to be within a one percentage point band of two per cent annually. MPs asked whether that target should be changed or loosened, and, while Carney did not directly offer any alternatives, he did argue that there should be that debate, albeit a "short" one.

The "high bar" that Carney thinks needs to be met before change can happen means that NGDP targeting — the idea of mandating the Bank to aim for a particular level of nominal (un-adjusted for inflation) GDP — is unlikely. He remains "far from convinced" that it could work. Similarly, while the USA has a dual mandate, requiring the Fed to target both inflation and unemployment, Carney isn't necessarily aiming for that as an end-stage for Britain either. He starts "from a position of considerable monetary stimulus to take up the slack", but believes that, for the time being, there is enough flexibility under the normal target to pull that off.

Where Carney marked the most substantial break with King was in his expressed belief that communication could be used more effectively to achieve the aims of the bank.

A huge part of monetary policy is expectations management — ensuring that people believe that the future economy is going to be certain way, and act on that belief. That's because many economic prophecies are self-fulfilling. If you tell everyone the stock market will crash, and have enough credibility that they act on it, then they will pull money out of the market and cause that very crash.

As a result, there's a huge difference between a central bank having a plan to keep interest rates low for a further two years, and a central bank saying it has a plan to keep interest rates low for a further two years. Carney understands that difference, and apparently plans to make the most of it.

No matter what happens, though, he has reiterated that he is only going to stay in charge for one five-year term, due to family commitments and a desire to get out of the high stakes world of central banking while he still can. While MPs expressed disbelief that someone could let something so prosaic as a family affect their job, Carney explained that he hoped to achieve all his goals in that span, and to make an exit "that is less newsworthy than my entrance".

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Show Hide image

Stability is essential to solve the pension problem

The new chancellor must ensure we have a period of stability for pension policymaking in order for everyone to acclimatise to a new era of personal responsibility in retirement, says 

There was a time when retirement seemed to take care of itself. It was normal to work, retire and then receive the state pension plus a company final salary pension, often a fairly generous figure, which also paid out to a spouse or partner on death.

That normality simply doesn’t exist for most people in 2016. There is much less certainty on what retirement looks like. The genesis of these experiences also starts much earlier. As final salary schemes fall out of favour, the UK is reaching a tipping point where savings in ‘defined contribution’ pension schemes become the most prevalent form of traditional retirement saving.

Saving for a ‘pension’ can mean a multitude of different things and the way your savings are organised can make a big difference to whether or not you are able to do what you planned in your later life – and also how your money is treated once you die.

George Osborne established a place for himself in the canon of personal savings policy through the introduction of ‘freedom and choice’ in pensions in 2015. This changed the rules dramatically, and gave pension income a level of public interest it had never seen before. Effectively the policymakers changed the rules, left the ring and took the ropes with them as we entered a new era of personal responsibility in retirement.

But what difference has that made? Have people changed their plans as a result, and what does 'normal' for retirement income look like now?

Old Mutual Wealth has just released. with YouGov, its third detailed survey of how people in the UK are planning their income needs in retirement. What is becoming clear is that 'normal' looks nothing like it did before. People have adjusted and are operating according to a new normal.

In the new normal, people are reliant on multiple sources of income in retirement, including actively using their home, as more people anticipate downsizing to provide some income. 24 per cent of future retirees have said they would consider releasing value from their home in one way or another.

In the new normal, working beyond your state pension age is no longer seen as drudgery. With increasing longevity, the appeal of keeping busy with work has grown. Almost one-third of future retirees are expecting work to provide some of their income in retirement, with just under half suggesting one of the reasons for doing so would be to maintain social interaction.

The new normal means less binary decision-making. Each choice an individual makes along the way becomes critical, and the answers themselves are less obvious. How do you best invest your savings? Where is the best place for a rainy day fund? How do you want to take income in the future and what happens to your assets when you die?

 An abundance of choices to provide answers to the above questions is good, but too much choice can paralyse decision-making. The new normal requires a plan earlier in life.

All the while, policymakers have continued to give people plenty of things to think about. In the past 12 months alone, the previous chancellor deliberated over whether – and how – to cut pension tax relief for higher earners. The ‘pensions-ISA’ system was mooted as the culmination of a project to hand savers complete control over their retirement savings, while also providing a welcome boost to Treasury coffers in the short term.

During her time as pensions minister, Baroness Altmann voiced her support for the current system of taxing pension income, rather than contributions, indicating a split between the DWP and HM Treasury on the matter. Baroness Altmann’s replacement at the DWP is Richard Harrington. It remains to be seen how much influence he will have and on what side of the camp he sits regarding taxing pensions.

Meanwhile, Philip Hammond has entered the Treasury while our new Prime Minister calls for greater unity. Following a tumultuous time for pensions, a change in tone towards greater unity and cross-department collaboration would be very welcome.

In order for everyone to acclimatise properly to the new normal, the new chancellor should commit to a return to a longer-term, strategic approach to pensions policymaking, enabling all parties, from regulators and providers to customers, to make decisions with confidence that the landscape will not continue to shift as fundamentally as it has in recent times.

Steven Levin is CEO of investment platforms at Old Mutual Wealth.

To view all of Old Mutual Wealth’s retirement reports, visit: products-and-investments/ pensions/pensions2015/