Nick Harvey, Investment Consultant at Punter Southall Investment Consulting comments: “The funding level of most defined benefit pension schemes will improve when long term interest rate expectations rise.
“Whether the first upward move in Bank Base Rate for 10 years is largely symbolic or actually good news for schemes’ funding positions, in most cases, depends on what happens to longer term gilt yields, which won’t necessarily react in the same way.
“The impact on funding positions also depends on whether there are more upward moves in Bank Base Rate to come and whether they arrive faster and/or are greater than the market is expecting. This increase has been largely expected by markets for the last few months.”
Alex Hutton-Mills, Managing Director, Lincoln Pensions, said: “Whilst today’s decision by the MPC to raise interest rates will marginally improve the funding position of some schemes, it has been expected and priced in for some time. Any improvement in funding will be modest as many schemes still contain significant levels of investment risk.
“Of more concern is the impact of the interest rate rise on sponsors’ business models. Rising rates hurt unhedged borrowers and, with Brexit around the corner, the 2018 forecasts and beyond do not bode well for the employer covenant supporting certain DB schemes. The DB pensions crisis is far from over – trustees need to remain vigilant and work to monitor and mitigate the increasing levels of risk in the financial system.”
Commenting on today’s increase in the Bank of England base rate, Steve Webb, Director of Policy at Royal London said: ‘After a decade of low and falling interest rates, today’s rise provides a modest boost for pensions. If today marks a turning point in interest rates this should signal a gradual recovery in annuity rates and could help to reduce deficits in company pension schemes. But it is important not to get carried away. Assuming that the Bank of England sticks to its plan for ‘gradual and limited’ increases, this announcement is unlikely to radically transform the pensions landscape as rates remain at historically low levels.
‘The one group who may be concerned by today’s news are those planning to take a transfer from a final salary pension. Transfer values are likely to track down as interest rates rise. Anyone considering a transfer may wish to take impartial advice on the pros and cons of a transfer as a matter of urgency, as transfer values are unlikely to remain at today’s very high levels’.
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