UK private sector pension schemes could find their aggregate liabilities increase by as much as £62bn if an interest rate rise fails to materialise one year after market expectations, research by JLT Employee Benefits has revealed.
If the pension consultancy firm’s predictions are correct, employers might have to find an extra £2m on average to top up their pension contributions.
John Breedon, head of investment consulting at JLT Employee Benefits, warned that £35bn of the possible increase would affect companies outside the FTSE 350 who may not have suitable hedging strategies in place to cope.
He also warned that if interest rates remained low, but inflation rose more than expected, the impact on pensions could be “bleak”, with the aggregate increase liabilities potentially reaching £100bn.
“There is an expectation that interest rates in developed economies will rise and when they do, pension deficits will improve,” Breedon explained.
“However, the critical point is not just whether the rise occurs, but its relative timing. Simply put, if it happens later than market expectations, pension schemes could be in a worse position.”