The Bank of England's (BoE) decision to increase interest rates for the first time in over a decade has been welcomed by the industry, yet the move will only be "symbolic" for most defined benefit (DB) schemes.
The doubling of the rate from 25 basis points (bps) to 50bps came yesterday after months of hints from the central bank, with its Monetary Policy Committee (MPC) approving the change with a 7-2 vote.
However, the move only returns the base rate to the 0.5% level it had stubbornly sat at from March 2009 until last August. Just two years before that, and before the financial crisis hit, the base rate was 5.5%.
Hargreaves Lansdown senior economist Ben Brettell said the accompanying minutes, which showed the BoE does not envisage further fast-paced increases as it previously indicated, have had the bigger effect.
"The BoE followed the script and raised the base rate to 0.5%," he said. "The move was widely expected, but sterling has still lost almost a cent [against the dollar] as the accompanying minutes guided towards a gradual pace of rate rises.
"[Yesterday's] move is largely symbolic - even though it's the first rise in more than a decade. The rights and wrongs of the decision will be debated ad infinitum, but a 25bps increase merely reverses last year's cut - which was arguably unnecessary - and returns rates to where they've been for the entire post-crisis period. So not much has changed."
However, the consequences of the decision on DB schemes and their liabilities is expected to be limited, especially with the market having priced in the decision for some time.
Royal London director of policy and former pensions minister Sir Steve Webb commented DB trustees "should not get carried away" with over-egging the impact of the rate hike.
"After a decade of low and falling interest rates, [this] rise provides a modest boost for pensions," he said. "If [yesterday] marks a turning point in interest rates, this should signal a gradual recovery in annuity rates and could help to reduce deficits in company pension schemes.
"But it is important not to get carried away. Assuming that the BoE sticks to its plan for ‘gradual and limited' increases, this announcement is unlikely to radically transform the pensions landscape as rates remain at historically low levels."
The group most likely to benefit, Webb added, are those considering transferring out of their DB plan, who "may wish to take impartial advice on the pros and cons of a transfer as a matter of urgency" with transfer values expected to fall on the back of the decision.
The "modest" move will also only highlight structural problems in the pension system, according to M&G Investments multi-asset fund manager Tony Finding.
"For pension funds, this modest move does little to help resolve the challenges created by almost a decade of ultra-low rates in terms of rising liabilities," he said. "That longer-dated gilts have rallied in response to the announcement only highlights the fact that longer-term structural dynamics remain problematic."
Meanwhile, Hymans Robertson chief investment officer Andy Green said the hike is unlikely to have any major impact on investment yields.
"This move by the Bank of England may not be the silver lining for pension funds that some predict, as nominal gilt yields and the real yield on index-linked gilts are little changed from their levels at the beginning of the year," he said.
"Many of the longer term issues facing the UK - such as Brexit and a sluggish housing market - look set to remain well into 2018 and this move has already been well-flagged in the market. In this ongoing environment of low yields and uncertainty we continue to recommend a focus on assets that can deliver predictable returns with attractive levels of income to deal with pension fund outflows."
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