How monetary policy is killing economic growth – and your dividend income

Current monetary policy is a disaster for economic growth, pension funds, and anyone relying on dividends for income, says Merryn Somerset Webb.

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We've been telling you for ages that the UK's insane monetary policy is killing the economy. Some proof arrives this morning in the form of a trading update from Carclo.

Carclo is a global supplier of technical plastics product (supplying everything from the supercar market to CCTV security domes); it is exactly the sort of exporter our government is always claiming to want to support most.

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A shame, then, that the update announces that it is unlikely to be able to pay its shareholders the dividend it promised them in June (payable in October and suggestive of a yield of just under 2%). Very low bond yields have created a technical pension deficit of such a size as to have the "effect of extinguishing the company's distributable reserves." This isn't about cash; it's about "legal and accounting restraints".

But nonetheless, the rise in the pension deficit means that Carclo isn't paying dividends and is unlikely to be investing as heavily in its future as it would be, either. This isn't going to be the last of this kind of announcement.

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As Hargreave Lansdown's Tom McPHail points out: "We're likely to see more of this kind of announcement in coming months, unless there is sharp pick up in bond yields. Current monetary policy may have kept the economy going but it is killing pension schemes, with disastrous consequences for any employers sponsoring a final salary scheme."

This really matters. It matters to anyone relying on dividends for income (other pension funds, perhaps). But more than that, it matters for our economic growth as a whole: if hordes of our companies are handicapped by their pension fund deficits we aren't going to have much.

There are solutions to this. McPhail suggests the Bank of England could "alleviate the situation by looking at issuing higher-yielding pension bonds specifically for purchase by annuity providers and pension schemes".

I reckon they could just normalise monetary policy (raise interest rates) and be done with it.

Failing that, they could encourage pension fund trustees to change the way they calculate deficits (assume long-term returns on their investments will be higher than the current gilt yield suggests, for example) or just give firms the chance to take a payment holiday (see my piece on this here).

What it can't afford to do is nothing.

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