Pension Threat: Fears Over New Stimulus Plan

The Bank of England (BoE) and European Central Bank (ECB) have announced further measures to ease the effects of the economic crisis.

The BoE confirmed another extension to its programme of quantitative easing, injecting a further £50bn to support the UK economy by boosting money supply.

It took the total value of expected asset purchases to £375bn - a move the National Association of Pension Funds (NAPF) seized upon saying it would damage retirement values even more.

The BOE decided against a change to the base rate of interest, which has stood at 0.5% since March 2009.

The bank's Monetary Policy Committee (MPC) took the QE decision less than a week after Sir Mervyn King said he had been left shocked at the pace at which economic conditions had worsened.

The European Central Bank, which had more scope than the Bank of England to slash its core interest rate, reduced it from 1% to 0.75% - a new low for the bloc as the effects of the eurozone debt crisis weigh on growth.

Its deposit rate was also cut, from 0.25% to zero, in a move aimed at encouraging banks to lend to each other.

Despite that, many stock markets in the euro area plunged as investors shunned risk.

The FTSE MIB in Italy and Spain's IBEX both lost more than 3% after another shock interest rate cut in China was seen as a reaction to a possible deterioration in the world economic outlook.

Here, Sir Mervyn has spoken repeatedly of the risks to the UK from the problems in the single currency area.

Official figures have showed the double-dip recession is deeper than originally feared.

Revised figures revealed a sharper decline in the economy in the final quarter of last year, when GDP shrank by 0.4% between October and December, compared with a previous estimate of 0.3%.

There was a 0.3% contraction in the first quarter of this year while the latest snapshot of activity by Markit estimated that the economy showed negative growth of 0.1% in the following three months.

The Office for National Statistics releases its first official estimate for growth in the second quarter later this month.

Chris Williamson, chief economist at Markit, said the results of its surveys were "firmly in the territory that has triggered action from the MPC in the past."

The Bank and Treasury have recently made major moves to try to kick-start lending and lift the country from the mire of recession.

Last Friday, the Bank said rules should be relaxed to free up billions of pounds of cash held on their balance sheets as a so-called liquidity buffer.

This followed the announcement earlier this month of a £100bn-plus scheme to boost bank lending.

The Bank is working on a new "funding for lending" scheme, while last week it held its first £5bn monthly auction under a six-month loan facility programme.

The NAPF chief executive Joanne Segars said while it welcomed measures to boost the economy, there was little evidence in the public domain that it was having a strong effect on boosting growth.

"The economists might argue about whether QE works but there is no doubt that it short-changes businesses running final salary pensions and people who are about to retire."

She explained: "QE worsens the yield on gilts, which increases the deficits of final salary pension funds and means people get a worse rate on their annuity. Those who are retiring could be locked into a weaker pension for the rest of their days."

The Sky News Money Panel correctly predicted a £50bn rise in QE in advance of today's meeting.

Ross Walker, UK economist at RBS, said: "The MPC's vote a month ago was on a knife edge 5-4 and the governor sounded distinctly downbeat at the tail end of last week when discussing the outlook for the financial sector.

"Although there are legitimate concerns over just how effective further QE purchases would be, a cut in bank rate continues to look unlikely."

Unlike Markit's prediction of -0.1%, he estimated that UK GDP will have fallen by 0.2% in the second quarter.

Anthony Thomson, the chairman of Metro Bank, believed the MPC could raise the QE total by as much as £75bn.

Amid the backlash against Barclays over the rate-rigging row, he voiced concerns over the wider scandal's potential to damage the economy.

He said: "Anything which reflects badly on the banking sector will also have an adverse impact on London as a financial centre. However, the Libor scandal is unlikely to be restricted to the UK."

Sir Martin Sorrell, the chief executive of advertising group WPP agreed the banking woes were "really damaging" to Britain's reputation as a financial centre but said the biggest risk he saw to the current economic outlook came from a "lack of willingness to take risks."

James Daley, the money editor at consumer group Which?, said the government had a tough balance to strike between tougher regulation of the banks and not scaring them away from the UK and therefore damaging the recovery.

He said: "Governments are under pressure from taxpayers and consumers to ensure that we never see a repeat of the financial crisis that we have endured over the past few years.

"So far, successive governments on both sides of the Atlantic have fudged the issue of banking reform. Hopefully the Libor scandal will be a catalyst for co-ordinated change on a global scale."

Small business owner Louise George, of Peter Popple's Popcorn, was scathing over the behaviour of banks, saying "This is damaging to the UK as this has affected trillions of pounds-worth of financial transactions and many people's trust in the UK as a financial centre will have been broken."

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