Any move by the Bank of England (BoE) to cut interest rates to zero or move them into negative territory would have a limited impact on well-hedged schemes, the industry says.
This morning, the central bank confirmed it has written to UK banks to assess their readiness should interest rates be cut to zero or turn negative and to understand the implications of such a move.
It noted, however, that the letter was "not indicative" that the bank's monetary policy committee would employ a zero or negative rate. The BoE's base rate is currently at a record low of 0.1%.
Aon head of asset allocation Tapan Datta said that, while any fall in rates would push up liabilities, most schemes had now hedged against the risk.
He said: "The good news is that thanks to the long-lived nature of this problem, whereby interest rates have kept falling, particularly so in the last decade, there has been a big uptake in in liability-driven investing. As such a lot of pension funds are now immunised from these falls in rates, because the liabilities are substantially hedged."
Despite this, he said there were still a "significant minority" of schemes that had not taken up liability-driven investment strategies, or had far lower levels of hedging that would be significantly impacted.
And he said the impact of negative rates would not necessarily be any different to any other fall in rates as long as they were just "one step down" into negative territory rather than deeply negative.
Datta said: "I think it is more of a symbolic effect of moving from a plus number to a minus number rather than anything else."
In an article for Professional Pensions in June, Cardano client portfolio manager Nigel Sillis agreed the impact on well-hedged schemes would be limited - noting that those schemes with a "full immunisation" approach to interest rate risks would be well placed to weather the knock-on effects.
But he said it was clear the range of possible future outcomes was increasing and the removal of a zero lower bound would cause increased volatility.
He explained: "Factoring in the myriad combination of upside and downside inflation risks, the established relationships between nominal yields, index-linked yields and inflation appear extremely challenged, adding volatility to break-even inflation markets and real yields."
Sillis added: "The current exceptional market environment underscores the rationale for removing sensitivity to unnecessary inflation and interest rate risks by hedging scheme liabilities to curve and inflation risks."
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