On the go: The Bank of England’s decision to raise interest rates could see up to £100bn in long-term liabilities removed from UK pension schemes, XPS Pensions has estimated.
The rate change made on February 3 from 0.25 per cent to 0.5 per cent marked the first back-to-back rise since 2004, and followed the central bank’s latest inflation forecast, predicted to hit 7.25 per cent by April.
The move is estimated to lead to the greatest fall in living standards since records began, prompting the BoE and the Treasury to co-ordinate announcements, the latter unveiling measures to limit the impact of soaring energy prices in a bid to calm markets and consumers.
The Pensions and Lifetime Savings Association warned in January that almost a half (47 per cent) of savers say that the rising cost of living has left them unable to save for retirement, though this did not dissuade the industry body from calling for a rise in the auto-enrolment contribution rate, from 8 per cent of a band of earnings to 12 per cent of all salary, by the end of the decade.
For defined benefit schemes, the picture is somewhat less bleak, however, especially those not fully hedged against inflation. XPS Pensions suggested that a rise in gilt yields coupled with the prospect of more stable inflation could, in fact, be good news for pension funds.
But it cautioned that its estimate of £100bn accounted only for a movement in liabilities based on gilt yields, and made no allowance for further changes to inflation, or the market value of assets.
DB scheme liabilities stood at £1.69tn at the end of 2021, according to January’s edition of the PPF 7800 index.
Felix Currell, senior investment consultant at XPS Pensions Group, said: “Rising inflation has been at the forefront of people’s minds since the supply-side concerns in 2021, and it is no surprise that the [BoE is] committing to a further increase in interest rates in an attempt to combat it.
“The key will be whether the right balance can be struck — will recent market growth be sustained with manageable inflation, or will investors lose confidence in a tightening monetary policy environment?”
BMO Global Asset Management recently reported that interest rate liability hedging surged by more than a quarter (27 per cent) in the last three months of 2021, rising to £46.5bn, while inflation hedging jumped 24 per cent to £24bn over the same period.
