The Bank of England's decision to cut interest rates for the first time in seven years will keep gilt yields lower for longer, increasing scheme deficits which are already at record highs.
Although the central bank's move to reduce the base rate to 0.25% and extend its quantitative easing (QE) programme was widely expected, the implications for defined benefit (DB) pension funds are significant.
Although the rate cut is unlikely to have an immediate significant impact on long-term rates, to which DB liabilities are exposed, it could have a negative impact on funding levels over the much longer term. Schemes must therefore focus on how the base rate will move over the next 20 to 30 years.
PwC pensions consulting partner Richard Cousins said it means long-term gilt yields are likely to take longer to reach their pre-crisis levels. This does not bode well given its recent pension risk survey revealed half of schemes did not have material hedging in place to protect against sustained low long-term rates.
"The next few years are going to be demanding for scheme trustees and sponsors as they try and juggle how to measure and repair stubborn deficits in a persistent low interest rate world," he added.
Many schemes have already seen their liabilities rocket since the Brexit vote, which resulted in gilt yields tumbling to record lows.
Pension liabilities for the FTSE 350 companies reached a record high of £856bn by the end of July, increasing £43bn from the end of June as a result of falling corporate bond and gilt yields, according to Mercer. The total deficit has increased by more than 40% between end of May and end of July, reaching £139bn.
Lincoln Pensions managing director Alex Hutton-Mills said: "For pension schemes, gilt yields have already baked in the broader, adverse impact on scheme funding following the referendum vote. The impact of today's decision will likely be more muted on the liability side.
"This, however, does not change the fact that trustees should ensure they have a good understanding of the longer term impact of lower gilt yields and whether there is a need to be hedged to interest rate exposure."
Punter Southall senior consultant Nick Harvey said deficits are likely to increase if the base rate stays lower for longer than the market has been anticipating or it has a knock-on effect to longer dated measures of rates.
"It is an important reminder that rates can still fall further and the BoE could end up joining the many other central banks with interest rates which are zero or negative."
At the same time, the announcement of an extra £70bn of QE including £60bn in government bond purchases, will likely drag down longer dated bond yields.
Harvey warned this is ultimately "bad news for most pension schemes" by pushing up the value of liabilities at a faster rate than assets.
Cardano head of clients Richard Dowell said this should be a wake-call for schemes: "For a long time, many have held firm in the belief that long-term rates can only go up. Increasingly, you have to question this belief and consider that we could be entering a truly long-term low rate environment.
"Look at Germany and Japan for example. The former has long-term rates approximately 1% lower than in the UK, while the latter has had near zero rates for two decades.
"It's entirely possible the UK is in for a similar experience and that means pension schemes should consider removing risk now. This is particularly important for schemes that are closed, as their time horizon is getting shorter.
The government will set up an infrastructure bank to support investment and to co-invest alongside investors including pension funds.
The Retail Prices Index (RPI) will be reformed and aligned with the housing cost-based version of the Consumer Prices Index, known as CPIH, by 2030, the Treasury has confirmed.
Companies could be overstating their pension liabilities by up to £60bn due to their life expectancy assumptions, according to XPS Pensions Group.
Estatee agent denies a shareholder’s absence from voting is an issue, finds Minerva Analytics.
In this live blog, Professional Pensions' sister title Investment Week collates all the breaking market news, analysis and opinion on equity, bond and currency movements as well as the impact of trade wars, tightening monetary policy and the Brexit negotiations....