Concerns about employer pension funding after boe rate hikeswritten by Bella Palmer
The Bank of England confirmed a further rise in interest rates today, from 1.75 per cent to 2.25 per cent, marking the highest rate since 2008
Pension scheme trustees have been urged to consider how a high interest rate environment could impact the ability of sponsoring employers to fund defined benefit (DB) schemes, and to “lock in” recent gains, following the Bank of England's latest interest rate increase.
The Bank of England confirmed a further rise in interest rates today (22 September), from 1.75 per cent to 2.25 per cent, marking the highest rate since 2008.
According to XPS, the increase has pushed UK pension schemes into surplus, based on a long-term target basis of gilts +0.5 per cent, with the rising interest rates prompting an improvement in pension scheme funding positions.
A rise of at least 0.5 per cent was already anticipated by investment markets, with a 2.7 per cent rise in long-term government bond yields since December 2021 reducing liabilities of UK DB pension schemes by £750bn, nearly 35 per cent, XPS Pensions Group senior consultant, Charlotte Jones, explained.
The energy cap should lead to prices rising less quickly than previously feared, but with the future far from certain, pension scheme trustees should strongly consider taking measures to lock in some of these gains by reducing levels of risk in their investment strategies or securing members’ benefits with an insurance company, Jones said.
However, LCP clarified that while rising long-term rates are generally good news for scheme funding levels, they will impact upon businesses differently depending on their debt structure and how exposed they are to interest rate fluctuations.
In light of this, it warned that any adverse impacts on covenant support available to the scheme could have “significant” consequences on an employer’s ability to provide financial support to its scheme.
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