The Bank of England (BoE) has cut its base interest rate to
a new record low of 0.25% and upped its quantitative easing (QE) program as the
UK economy struggles in the immediate aftermath of the Brexit referendum.
“Bigger pension deficits will inevitably lead to calls for a hike in employer contributions.”The decision is a further blow to the funding positions of
the country’s pension funds. UK pension liabilities are priced relative to bond
yields, which will be pushed down further as a result of the BoE’s decision.
Gilt yields had already hit record lows following the June
23 referendum, and were trading at a yield of 0.67% half an hour after the
At the end of July, consultant firm JLT Employee Benefits estimated
that the aggregate deficit of UK private sector pensions had risen to £390
billion ($513 billion), a record high. Mercer reported that the combined
pension deficit of the largest 350 companies in the country had also hit a
record high of £139 billion.
“Following the UK’s vote to leave the European Union, the
exchange rate has fallen and the outlook for growth in the short to medium term
has weakened markedly,” the BoE said in a statement.
The BoE also warned of a future increase in unemployment and
a spike in inflation. “Consistent with this, recent surveys of business
activity, confidence, and optimism suggest that the UK is likely to see little
growth in GDP in the second half of this year,” it said.
In addition, the Bank’s monetary policy committee said it was willing to cut the interest rate further towards its “lower bound,”
which is “close to, but a little above, zero.”
As well as the rate cut, the BoE pledged to buy £60 billion worth
of government bonds and £10 billion of corporate bonds, expanding its QE
program to £435 billion.
Charles Cowling, director at JLT Employee Benefits, said the decision was
“painful” for pensions.
who have been reluctant to reduce or remove exposure to interest rate risk in
their pension scheme, through liability-driven
investment or other means, are faced with the dilemma of whether to act now
that prices have moved even further against them,” Cowling said. “The risky
alternative is to stay in the investment casino and hope that markets are wrong
and interest rates rise soon.”
facing valuations this year also have the prospect of “difficult negotiations”
with sponsors, Cowling added, “as bigger pension deficits will inevitably lead
to calls for a hike in employer contributions.”
The BoE had held the base rate at 0.5% since March 2009 at
the height of the financial crisis. Before the Brexit vote, economists were
forecasting a slow upward path for interest rates.
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