Pension deficits reach a new high before interest rate decision

 
Oliver Gill
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Governor Mark Carney Presents Bank of England's Financial Stability Report
Experts said that the Bank of England's rate decision could create challenges for pension deficit negotiations (Source: Getty)

The pension deficits of UK private companies reached the record level of £390bn at the end of July, having leapt by £80bn in the last two months alone.

Public companies fared no better in the JLT Employee Benefits Index, as FTSE 350 companies’ defined benefit schemes deficits increased from £114bn in May to £156bn in July.

“Markets may have recovered, following their initial dive in the aftermath of the Brexit vote, but conditions remain challenging for pension schemes. With hints of a rate cut on 4th August, at the next Bank of England’s meeting, it looks increasingly likely that record low rates are here to stay,” said Charles Cowling of JLT.

The concern from experts is that a rate cut and a lower interest environment would fuel further increases in the calculation of pension liabilities. Cowling said that this could be particularly problematic for those companies going through their tri-annual pension valuations.

“Companies with actuarial valuations this year will be hardest hit and trustees will likely have little option but to demand significant increases in cash funding from companies,” he said.

Alex Hutton-Mills of Lincoln Pensions agreed and said that negotiations between companies and pension trustees are likely to be more challenging: “Companies are going to have to think very clearly about affordability,” he said.

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In addition, falling yields have left trustees that have previously not hedged interest rates in a conundrum, said Cowling.

“Instinctively, it will be difficult for trustees and companies to hedge interest rates at current levels when they have so far held off doing so in the hope of an interest rate rise – and have seen pension deficits increase as a result. By continuing a policy of not hedging interest rates, companies and trustees are effectively taking a large bet against the markets,” he said.

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