Quantitative Easing (Economic Affairs Committee Report)

Lord Davies of Brixton Excerpts

Monday 15th November 2021 Grand Committee

[Lord Davies of Brixton (Lab)]

My Lords, we must thank the Economic Affairs Committee for its authoritative report on quantitative easing, and the noble Lord, Lord Forsyth, for securing this debate. It has been enlightening to hear the earlier speeches from noble Lords and the noble Baroness.

My remarks will refer to the impact of quantitative easing on pensions, an issue touched on in the report but not dealt with in any detail. That is odd, perhaps, because the explanation of quantitative easing in the introduction refers specifically to the important role played by pension funds in its operation. Initially, I was going to express some disappointment, but we cannot blame the committee, because there is a general lack of information. Those of us who have worked in pensions for the last 10 or 15 years will be aware that there has been a lot of discussion of quantitative easing and its effect on pension funds. We all have views; what we do not really have is any hard information or evidence, and that is inevitably reflected in the committee’s report.

I will not resolve that situation in today’s debate, but it suggests that there is a need for some harder studies on how quantitative easing has impacted on pension funds. You will hear the views but, when you seek the evidence, there is a conspicuous lack. However, I am never afraid to express views, even with a shortfall in evidence, and there are a couple of things that I would like to say.

The committee refers in a couple of places in its report to the impact that quantitative easing has on pension provision. There is a reference to the important evidence from the Pensions and Lifetime Savings Association. I very much agree with its statement that

“on balance … quantitative easing had benefitted pension funds due to the support it had provided to the economy, which it said helped businesses which sponsor and contribute to pension schemes”.

However, the association also mentioned the downside, which is that

“quantitative easing had resulted in ‘significant increases in deficits’—

that is, the deficits of pension funds—

“that have had to be filled through higher employer contributions or greater investment returns”.

While that provides a partial picture of the impact of quantitative easing on pension funds, it fails to explain what would have happened without quantitative easing. What is the counterfactual in a pensions world without quantitative easing? That is why the committee’s conclusion—that the use of quantitative easing in 2009

“in conjunction with expansionary fiscal policy, prevented a recurrence of the Great Depression”—

is so important. It would be wrong to point to the reduction in yields that has undoubtedly taken place without also considering what would have happened to investments in general had the policy not been introduced.

As Charlie Bean explained back in 2012, when he was Deputy Governor for monetary policy at the Bank of England, while the policy has led to an increase in deficits,

“the impact of QE is nevertheless small compared to the movement in the deficit associated with other factors, such as the collapse in equity prices as a result of the financial crisis and the recession”.

That conclusion has stood the test of time. He went on to say that higher equity yields were as much a purpose of the policy as lower fixed-interest yields.

The report also refers to the submission received from Professor Davis, who said that there is “some evidence” of pension funds engaging in a “search for yield” through investment in leveraged alternative assets, structured products, private equity and derivatives. Whatever we think of such investments, whether they are problematic depends on their scale and their suitability to match pension liabilities. There is no a priori reason to rule them out.

More generally, the search for yield is surely what pension funds need to do. They should look for investments to provide a decent return on the assets set aside to secure future pensions. The idea that the best, most secure and most appropriate investment for pension funds is government debt has been massively oversold and has led to a poor outcome for those funds.

Coincidentally, I would refer the Committee to the Financial Times and an article by Martin Wolf, the newspaper’s chief economic commentator, who refers to the need to have a sensibly invested pension fund, which he defines as one invested predominantly in equities. It is important to understand, therefore, that the greater the extent to which pension funds follow this sage advice, the less significant will be the adverse effects of quantitative easing.

Equity yields have not suffered from the same effect and, as argued by Charlie Bean, they have benefited from the policy compared to what would have happened in its absence. It is also important to question the extent to which the decline in yields—which has undoubtedly taken place, with the inevitable impact on pension fund liabilities—is due to quantitative easing as compared to other factors. I think that issue was considered by the committee.

Given this reduction in yield, I do not want to paint too rosy a picture of the effect of quantitative easing on pension funds, but the underlying problem is not quantitative easing itself but the utter failure of the Government to address the productivity crisis. Quantitative easing provided a respite during which we could have got to grips with these long-running economic issues. I am sure that we would have a variety of views about how the benefits of increased productivity might be used, but adequate pensions must be a leading candidate. I am sure we all agree that this is at the heart of the financial problems we face as a country—not quantitative easing but the failure to grow productivity.

I agree with the chair of the committee that the Bank has not been subject to sufficient scrutiny in pursuing this policy, but there is a greater question about what objectives the Bank should follow. The report correctly highlights the adverse distributional impact of quantitative easing. The right conclusion is that the Bank should take this more into account by understanding those effects.