An interest rate rise would not act as a “panacea” for the pensions industry, Redington co-CEO Rob Gardner has said.

His comments follow news that the Bank of England’s Monetary Policy Committee (MPC) has voted in favour, with a majority of 8-1, to keep the current interest rate of 0.5 per cent.

This decision comes after CPI inflation fell to zero in June. Furthermore, the report by the MPC described the outlook for inflation as “muted”.

Pension funds may be disappointed with the decision, which has kept yields low for many months. However, Gardner believes a rate rise would not solve many of the “deep and complex” problems faced by many DB schemes.

“Given the rock-bottom rate environment the pensions industry has endured since the financial crisis, many see a rate rise as a manna from heaven, but the reality is far more complex,” he added.

As an example he noted on 1 January 2015, 30-year gilts were yielding 2.5 per cent and the PPF 7800 index, representative of 6,057 UK schemes, had a total liability of £1,502bn.

In June this year, the PPF liabilities, after a 0.20 per cent rise in 30-year gilts to 2.70 per cent only decreased by just £35bn to £1,467bn.

“Even if the Bank of England does raise base rates by 0.25 per cent it's unlikely that 30-year gilts will move higher by the same amount. So we can see that a 0.25 per cent interest rate rise would hardly be game-changing,” he explained.

Gardner said interest rates would need to increase by over 1.5 per cent to overcome the current PPF deficit.

Therefore, he believes many pension funds need to “do things differently” rather than “banking on market or economic events to bail them out”.

He suggested using new tools and techniques to manage and control their assets, liabilities and risk. These included diversification away from equities, liability driven investing, liability management and buy-ins.

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