Bank of England interest rate rises by 0.25%

With liabilities of UK pension schemes having already reduced by £420bn since the first increase in base rates was announced on 16 December 2021, a further rise will likely be good news for pension scheme sponsors if gilt yields continue to track upwards in line with interest rates.

An analysis from XPS Pensions’ DB:UK Funding Watch has found that the 0.25% rise could translate into an additional £100bn* in savings for pension schemes if long-term gilt yields also rise as a result.

Tom Birkin, Actuary at XPS Pensions Group, commented: “Despite the UK currently experiencing the highest levels of inflation for over 30 years, with interest rates rising and long term expectations of inflation now stabilising, pension schemes which are not fully hedged will be better funded than they were at this time last year. Given the cost of living crisis facing pensioners and with caps on pension increases already limiting pension income, pension scheme trustees may come under increasing pressure to pass on some of these funding improvements to their members by providing discretionary increases to members’ pensions above inflation caps.”

 

*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.