Bank of England increase interest rates by 0.25%

Liabilities of UK pension schemes have already reduced by £630bn as a result of gilt yields tracking rising interest rates following the first base rate increase on 16 December 2021. Today’s announcement of a further rise could spell good news for pension scheme sponsors if this trend continues.

The market has been broadly expecting a 0.25% increase, so the impact on pensions schemes of this news in itself is likely to be modest. However, there are a number of other drivers that have scope to continue to move gilt yields in the coming weeks including the May inflation numbers due next week.

Charlotte Jones, Actuary at XPS Pensions Group, commented: “Some pension schemes will have seen a marked improvement in their funding positions over 2022. According to XPS’s DB:UK Funding Watch, UK pension scheme deficits** have reduced by nearly £250bn. Schemes in a good position should start to focus on longer term security for their members, whether that be securing a scheme’s liabilities with an insurer or reviewing their investment strategy.”

*Movement in liabilities based on gilt yield movement only, no allowance for changes to inflation or market value of assets. This does not allow for any offsetting reduction in value to hedged assets.

** on a long term target basis