Bank of England joins the "forward guidance" party

The Bank of England's Monetary Policy Committee has announced that they will adopt "forward guidance" - a move which could prove psychologically self-defeating, or worse financially ruinous.

A few weeks ago I wrote in this blog that I felt the adoption of "forward guidance" by the Bank of England’s Monetary Policy Committee would be a mistake. Well, as expected, they did so, in an announcement timed to coincide with the publication of the Bank’s August Inflation Report -the quarterly document which lays out the Bank’s perception of the current state of the economy and forecasts for its performance over the next few years.

In that previous blog I highlighted the danger that forward guidance could inflict self-defeating psychological damage upon people and businesses by telling them, effectively, to ignore the good economic headlines that are increasingly appearing in the newspapers - i.e. the Bank of England doesn’t believe a word of it, and therefore won’t be raising interest rates for years to come.

The other side of the coin is potentially as dangerous. The form of guidance adopted was an assurance that the Bank wouldn’t raise rates until unemployment hit 7.0 per cent, (it is currently 7.8 per cent, and the Bank’s Report expects it to fall to 7.0 per cent only in mid-2016). In a vain attempt to preserve what’s left of the MPC’s credibility as an inflation fighter, caveats, or "knock-outs", were added to this promise. There were three of these: they wouldn’t wait that long to tighten policy if they thought a) inflation was going to be above 2.5 per cent in eighteen months to two years' time, b) inflation expectations became "unanchored", or c) "the stance of monetary policy pose[d] a significant threat to financial stability".

The nightmare scenario for the Bank, and for us all, is that policy has to be tightened because one of the "knock-outs" has been triggered before unemployment has fallen meaningfully. Imagine a world, 12 or 18 months hence, where either "knock-out" a) or b) is triggered, but unemployment is stuck stubbornly at 7.2 per cent. Given what's happening in the housing market, the prospects for acceleration thereof following this guidance, and the UK economy’s propensity to exhibit high inflation, I see a real danger that knock-out b) is the problem.

On the other hand, given the "productivity puzzle", (in this recession, productivity has dropped, and unemployment has risen less than one might normally expect), the stage seems set for productivity to rise, at the expense of employment, especially as employers become more confident and commit to long-delayed capital investment in new, more efficient plants and machinery.

If either inflation "knock-out" is triggered within the 12 to 18 months time horizon I mentioned above, that is a lot sooner than the date at which the Bank of England’s own forecasts expect unemployment to hit 7 per cent, i.e. mid-2016, (and Carney assures us 7 per cent is only a "way station" anyway, not a "trigger" for higher rates), and the danger here is that individuals and businesses are now fooled into taking on more and more debt, comforted by the Bank’s prediction that rates will stay where they are for almost another 3 years at a minimum, and the UK can already hardly be characterised as a country with low private debt. If rates do have to rise much sooner than this, then loan delinquency could sky rocket.

Outside the Bank of England. Photograph: Getty Images.

Chairman of  Saxo Capital Markets Board

An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee.

More of his work can be found here.

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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/