Steven Cameron, Pensions Director at Aegon, following the Bank of England’s decision to cut to reduce the main bank rate by 50 basis points to 0.25%.
“We hope the emergency 0.5% cut in the bank’s base rate will support businesses and consumer confidence through the coronavirus crisis. This should reduce the cost of borrowing for businesses and individuals during what we hope will be a short term period of disruption.
“It does, however, pose particular challenges for those approaching retirement. The recent fall in the stock market will mean those whose pension is primarily invested in stocks and shares will have seen their pension pot fall in value. The reduction in interest rates creates a double whammy as annuity rates are also likely to be cut.
“As a result of the pension freedoms, individuals with defined contribution pensions now have flexibility over when they start taking a retirement income and can choose to remain invested, drawing an income, rather than buying an annuity. While there is no guarantee around if and when fund values and annuity rates will bounce back, individuals about to retire might want to seek advice on their options, including potentially deferring locking into annuities at a particularly adverse point in time.”
Commenting on the Bank of England’s decision to cut interest rates to 0.25% this morning, Hemmo Hemmes, Chief Investment Strategist at Cardano, said: “Today we’ve seen the Bank of England fall in to line with the co-ordinated response of global policymakers in responding to the COVID-19 outbreak. At this juncture, while monetary stimulus can help reduce liquidity concerns around the functioning of financial markets, unfortunately it will do little to help minimise the virus’ impact in the short term. We have a playbook for how this virus accelerates once it appears within a population, following the experiences of China and South Korea. We also have a playbook for the strategy required of Governments to minimise its impact – containment and social distancing. To that effect, the more authorities try to contain its spread, the more the global economy will stall.
“Given that the Bank of England is essentially out of bullets in terms of further interest rate cuts from here, we anticipate significant fiscal stimulus to come from the Government’s budget today. Governments and Central Banks working together as part of a coordinated response is essential. However until the economic damage is understood, we anticipate financial markets continue to price in a high likelihood of a global recession.”
Simeon Willis, Chief Investment Officer at XPS Pensions Group comments: The cut in the bank rate from 0.75% to 0.25% today could prove bitter sweet for pension schemes. The surprise move will likely bolster asset values such as equities but will add weight to the falling gilt yields. These falls have proved to be as much if not more damaging to pension funding levels than equity market falls so far this year. Pension liabilities have risen substantially off the back of falling gilt yields which at the shorter maturities are linked closely to the bank rate.
Further, there are differing views on whether monetary policy can provide effective support in response to Coronavirus. The rationale being you can’t boost the economy by encouraging people to spend money, if people can’t go to work to meet the demand. The side effect therefore could be a rise in inflation which would add to pension scheme liabilities.
Time will tell if the strategy works.
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