Charlotte Jones, Senior Consultant at XPS Pensions Group, commented: “Analysis by XPS’s DB:UK funding tracker shows that the average UK pension schemes is now in surplus*, with the improvement in funding positions largely attributable to rising gilt yields and the repeated lifting of interest rates by the Bank of England. In spite of recent market turmoil, since the first interest rates rise in December 2021 approximately £800bn has been wiped off the value of UK DB pension scheme liabilities, which equates to a 35% drop in their value.
However, the full impact of the market turmoil following the mini budget is not yet known, and some schemes who were forced to reduce their hedging before gilt yields dropped in the latter half of October may yet find themselves worse off or even pushed back into a deficit.”
*On a long-term target basis of gilts + 0.5%
Victor Lam, Fiduciary Investment Specialist at ZEDRA, said: ”The Bank of England increased rates by 75 basis points, the largest increase since 1989, bringing the bank rate to 3% as the central bank tackles record high inflation. September CPI returned to a 40-year high of 10.1% and it is expected to increase further. Although, longer term projections see inflation to be just over 2% in three years’ time. The move today was widely anticipated although the vote was not unanimous, with a vote of 7-2, with one member voting for a 50 basis point increase and another preferring only 25 basis points.
“Last night the Fed increased rates by 75 basis points for the fourth time a in a row. Markets initially rose on new language in the FOMC statement hinting at a step down in policy and gave rise to hopes for a lower 50 basis point increase in December. However, during the press conference Fed Chair Jerome Powell came across as much more hawkish. Despite noting the size of future rate hikes could be smaller, the peak interest rate may be higher than initially expected due to persistently high inflation. Markets fell over 3 percentage points during yesterday’s session given they were anticipating a less hawkish tone from Powell.
“Similarly to last night, the market is also anticipating a smaller December rate increase by the BoE although they are in a different position due to the lack of clarity on the government’s fiscal policy. Prior to the announcement sterling had been gradually falling versus the dollar and spiked below $1.12 when the rate increase was announced. UK equity markets increased on the announcement before falling back to prior levels.”
Jonathan Camfield, Partner at LCP, said: “The 0.75% interest rate rise was widely anticipated and priced into the markets and therefore there should be little immediate impact on pension scheme finances. However, of broader concern to pension schemes will be the evolving worsening economic outlook, including the Bank of England’s updated core projection of a longer recession lasting throughout 2023 and potentially beyond. This has the potential to impact asset prices, and also to impact the financial strength of companies that sponsor pension schemes. It can also of course be expected to put many pensioners under further financial strain, particularly at a time of high inflation, which also continues to be part of the Bank’s expectations for the next 12 months. Having said that, whilst there is clearly lots of bad news out there at the moment, it must be remembered that pension schemes generally have never been in a healthier financial position, helped significantly by higher long term interest rates.”
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