Low interest rates reduce pension scheme generosity

Written by Talya Misiri
14/11/16

Low interest rates since 2013 have resulted in a reduction of generosity by firms for defined benefit pension schemes, YouGov has found.

According to its recent survey which questioned more than 1,000 employers, 60 per cent reported that their pension scheme had been affected by low interest rates.

Twelve per cent of employers said that they had cut scheme generosity in response to this and more than a third of large businesses (those with 20,000 or more staff members) had decreased the generosity of their pension benefits for staff as deficits rose from the interest rate amendments.

The survey, commissioned by the Chartered Institute of Personnel and Development, also found that 10 per cent of affected employers had to restrict salary rises to maintain scheme costs.

It was also noted that 23 per cent of businesses in retail, wholesale and motor sectors had cut profits in response to growing pension scheme deficits. Seventeen per cent of medium-sized businesses had reacted to increasing pension costs by lowering profits.

Forty per cent of the sample group questioned claimed that their pension schemes/s had not been affected by low interest rates.

The YouGov study questioned how firms had responded to the increasing cost of DB pension schemes caused by low interest rates since 2013. The survey was carried out in September, month after the Bank of England introduced its quantitative easing policy and lowered interest rates.

“The evidence from this report is at odds with the Bank of England’s view that its quantitative easing (QE) programme isn’t harming business,” CIPD performance and reward adviser Charles Cotton told the Financial Times.

The survey’s findings contradict the opinions of Bank of England deputy governor Dr Ben Broadbent who previously stated that the BoE has not yet found any material evidence which suggests QE and interest rate changes had negatively impacted pension funds. Broadbent argued the case before the Work and Pensions Committee last month.

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