BoE rate hike 'not cause for concern' for pension schemes

The BoE raised interest rates to 3% in the biggest single increase in 33 years

Holly Roach
clock • 3 min read
The Bank of England's decision to raise rates to 3pc was well expected
Image:

The Bank of England's decision to raise rates to 3pc was well expected

The pensions industry has argued the 0.75% rise in interest rates from the Bank of England (BoE) should “not be too much cause for concern” for schemes but fears of further increases loom.

The historic hike to 3% - announced on 3 November - follows much financial market speculation following the disastrous Mini Budget in September and the increasing economic uncertainties over the last few years.

However, the industry is not offering too much concern for the time being.

Hymans Robertson co-head of defined benefit (DB) investment Elaine Torry said for schemes, the increase in short-dated rates "in isolation should not be too much cause for concern".

However, she warned the rationale for the increase, coupled with other upcoming fiscal announcements "could cause a ripple effect up the yield curve".

"If this happens, the rate rise could be a contributing factor to certain schemes being faced with fielding a further round of collateral calls, whilst others may find themselves in the position to be able to afford to de-risk and lock in funding level gains."

Lane Clark & Peacock partner Jonathan Camfield agreed there should be "little immediate impact on pension scheme finances" following the rise due to it being "widely anticipated and priced into the markets".

However, he warned a broader concern to pension schemes will be "the evolving worsening economic outlook, including the BoE's updated core projection of a longer recession lasting throughout 2023 and potentially beyond".

"This has the potential to impact asset prices, and also to impact the financial strength of companies that sponsor pension schemes. It can also of course be expected to put many pensioners under further financial strain, particularly at a time of high inflation, which also continues to be part of the bank's expectations for the next 12 months."

He also warned the industry to remember pension schemes "generally have never been in a healthier financial position, helped significantly by higher long term interest rates".

LV= warned that by the end of 2023, rates could hit 3.75%. Chief investment officer Adam Ruddle said: "The bank has been clear that managing inflation down is a key responsibility - even if that means subdued economic growth.

"While an increased rate helps tackle inflation, it hinders economic growth. The bank's views on inflation have fallen as a result of the energy price capping initiatives but risks have increased that inflation may remain entrenched for longer than previously expected.

"This likely means that interest rates will continue to rise and remain at higher levels for longer. We anticipate that interest rates will continue to rise and may reach 3.75% by the end of 2023."

Aviva Investors head of rates Edward Hutchings suggested today's increase "will most likely mark the peak in pace of tightening, especially with the bank highlighting financial markets are pricing too much too soon".

Torry warned the challenge "overshadowing" many schemes at the moment is the "overarching balancing act that is having to be performed between managing risk and sticking to strategy versus the practicalities of raising cash to field collateral calls within the required timescales".

"With November's Autumn Statement a fortnight away uncertainty remains for many. DB trustees must evaluate whether this interest rate hike, and subsequent knock-on effects, present an ironic opportunity to take advantage of improvements in funding positions or whether running to stand still will continue to dominate time and attention," she said.

Hutching added: "Next up for the UK will see the focus shift to the Autumn Statement to see what the chancellor's fiscal plans are, but in the meantime the headlines point to gilts being relatively more supported, however the currency less so."

More on Investment

Partner Content: Is the interest rate descent the time to harvest bonds?

Partner Content: Is the interest rate descent the time to harvest bonds?

Markets expect interest rates to fall this year, offering investors the strongest opportunity for fixed income seen for a long time. Watch this video podcast to learn how best to harvest this exciting opportunity.

Sarka Halas
clock 28 March 2024 • 1 min read
Partner Insight: Diversification and income drive investor appetite for real assets 

Partner Insight: Diversification and income drive investor appetite for real assets 

Challenging markets reinforced the value of real assets in providing diversification and uncorrelated returns.

Sarka Halas
clock 27 March 2024 • 1 min read
Cornwall Pension Fund commits £40m to Octopus Energy Transition Fund

Cornwall Pension Fund commits £40m to Octopus Energy Transition Fund

Investment part of fund’s efforts to reach net zero across its investment portfolio

Martin Richmond
clock 26 March 2024 • 1 min read
Trustpilot