BoE MPC vote could spell danger for pension schemes

The Bank of England (BoE) Monetary Policy Committee (MPC) vote, which saw members voting to cut interest rates, could mean a difficult 12 months for pension schemes.

In the first vote in three years, two out of nine members of the MPC voted to reduce interest rates by 0.25 per cent after the BoE predicted slower long-term growth than expected.

In its Monetary Policy Report, the BoE predicted that the slowing economy would lead to lower inflation and CPI could fall to 1.5 per cent by the end of 2020.

Kempen senior portfolio manager and LDI specialist, Rob Scammell, explained that the BoE predictions are not good news for pension schemes.

“With inflation expected to be lower, productivity still weak and growth being revised down, there is only a bleak prospect of higher interest rates, which would have had the biggest single positive impact on funding ratios,” he said.

Kingswood head of research, Rupert Thompson, noted that, although it was unusual for the committee members to vote for a rate cut, “the split vote just continues the shift in recent months both by the bank and the market away from the view that rates will necessarily have to head higher”.

He added: “The bank continues to state that modest policy tightening at a gradual and limited pace might be needed if the economy performs as is expected.

“Yet, it also highlights that a rate cut could be necessary if downside risks materialise. In a nutshell, the bank is sitting on the fence and keeping its options open.”

Scammell added that, although schemes may benefit slightly from the major political parties being likely to increase borrowing after the General Election, the next year looks bleak for trustees.

“Leaving specific politics aside, higher borrowing would increase the supply of gilts and could, other things being equal, lead to higher yields,” he continued.

“Trustees might just have a silver lining on the horizon by the end of 2020 – but the next twelve months look challenging at best.”

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