A cut too far?
Editorial: It was expected, but that makes it no less painful: pension scheme trustees are licking their wounds after the Bank of England decided yesterday that a further cut in the bank rate would help the UK economy back on its feet, together with more quantitative easing.
Brexit had already increased pension scheme deficits, despite rising asset values. Liabilities and deficits reached record highs after the referendum because of falling corporate bond yields.
The cut to 0.25 per cent is a further blow, and will have trustees up at night.
Consultants are calling the cut, which moved bond yields even lower, potentially “catastrophic” for pension funds, saying that schemes with 2016 valuations will have to face some tough sponsor negotiations.
Ramping up employer contributions will be one of the few available exit strategies. But will trustees always be able to get them – or even want them – if Brexit has made covenant potentially just as big an issue?
Ros Altmann, the former pensions minister, said the Bank of England is undermining its own goal of growth as the policy measures increase scheme deficits, forcing companies to pour more money into defined benefit schemes instead of investing in their businesses.
Crucially, there is also a question of fairness; if companies pour cash into DB schemes rather than paying higher dividends, where does this leave defined contribution savers?
Regardless of the fact they don’t have fixed pension entitlements, they still have to be able to live in retirement.
Sandra Wolf is editor at Pensions Expert. You can follow her on Twitter @SandraCWK and the team @pensions_expert.