On the go: The Bank of England has cut its base rate to a historic low of 0.1 per cent, while announcing plans to increase its balance sheet of bonds by £200bn.
The return to quantitative easing was announced on Thursday in response to the economic impact of the Covid-19 outbreak in the UK, while new fiscal measures from the Treasury are expected on Friday.
The monetary measures are expected to support the currently volatile gilt market, putting downward pressure on yields. Unhedged liabilities for defined benefit pension schemes will therefore probably rise, while the cost of hedging will also increase.
Amid this phenomenon, some economic commentators have cast doubt as to whether the central bank’s measure will actually work.
“Once again we’re seeing central bankers using the playbook from the last financial crisis… it’s the solutions of yesteryear when liquidity and credit were the problems,” said Kevin Doran, chief investment officer at AJ Bell.
“This time it truly is different: with a workforce on lockdown, there’s a production chasm about to open up.
“To fill the gap, policymakers need to be working with governments to introduce formal debt relief. Not forbearance, not interest holidays, but genuine relief from servicing debts as the world enters its enforced hibernation,” Mr Doran added.
While asset and liability shocks abound for DB schemes, pensions experts have been equally concerned about the impact on sponsoring employers, whose covenant schemes rely on for funding.
Consultancy LCP has called on the Pensions Regulator to clarify its expectations around DB funding, given that schemes pushing employers into insolvency is unlikely to serve members well.
Steven Taylor, partner at the company, said: “In past crises, the system has shown flexibility, with sponsors able to adjust recovery plans to deal with short-term pressures.
“We now need companies and trustees to work together to come up with plans that help the company to survive while retaining a credible approach to pension scheme funding, and provide appropriate protection for scheme members.
“Urgent clarity from TPR would be welcome to help trustees and schemes understand their options and how the regulator is likely to respond.”
